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What Are the Top Grain Trading Marketing Strategies?

December 2, 2020 by Daniels Trading| Ag Marketing

When it comes to grain trading, basis is a vital concept to grasp. It denotes the difference between a commodity’s local price and its current price on the futures market: Basis = cash market price – futures market price. For grain producers and speculators, basis plays a major role in whether crops are taken to market or stored to sell later.

Being able to recognize discrepancies between the cash and futures markets is a key skill successful grain traders possess. In this article, we’ll break down what basis means to the markets and a few strategies for capitalizing on variance.

Basis 101: Under and Over

At first, the idea of basis can seem a bit abstract. However, much of the mystery falls away by simply looking at a real-world example.

Assume that Carey is a corn grower in eastern Nebraska who is strategizing on how to optimize returns on this year’s crop. Early in the planting season, Carey takes a close look at both corn futures pricing and the local market in Central City, Nebraska. As it applies to grain trading, two forms of basis will play large roles in Carey’s marketing plan: over and under.

Are you prepared for this year’s planting season? If you work with Daniels  Trading, we’ll provide you with a customized approach to ensure you save time  and money and to help you protect against volatile markets. Schedule a  consultation with an ag marketing expert today. 

On April 15, Carey checks the corn prices at Central City, which come in at $3.85 per bushel. Later in the day, the Chicago Mercantile Exchange’s (CME) May corn futures are listed at $4.05 per bushel. The basis is as follows:

  • Cash – futures = basis
  • $3.85 – $4.05 = $-0.20

The April 15 basis for corn in eastern Nebraska is -$0.20 per bushel, or “20 under May.” With a negative basis, or cash prices under the futures price, there is ample regional supply. For local producers, this places their crops at a relative disadvantage, and harvest time will be decision time: Do I market or store this year’s crop? For producers with self-storage capacity and a steady cash flow, it may be best to store instead of market.

Now, let’s say that Central City corn prices are significantly stronger, coming in at $4.25 per bushel while May CME corn trades at $4.05 per bushel. The grain trading basis flips:

  • $4.25 – $4.05 = $0.20

Now, Carey’s April 15 basis is $0.20 or “20 over May.” A positive basis, or the cash price over futures, suggests that local supplies are short. This places local producers in a strong position relative to the aggregate market. In this case, marketing at harvest time may be the best course of action.

Grain Trading 101: Long and Short the Basis

Given Carey’s potentially long or short basis positions, are there any strategies that can help maximize profits while limiting risk? Yes. By going long or short the basis, Carey can market this year’s crop from a position of strength.

Come September, it’s decision time for Carey. Corn prices in Central City ($3.75) are trading under those of December CME corn ($4.00), producing a “25 under December” scenario. In this case, going long the basis may be a good idea. This grain trading strategy is executed by going long the cash market while shorting the futures market.

To go long the basis, Carey decides to self-store this year’s crop while selling CME December corn. Accordingly, as the basis improves from -$0.25, Carey will realize a profit. If local demand drives Central City prices higher during October, November, or early December, revenues from cash sales will outpace losses taken on the futures short.

In the event that September brings a positive basis, going short the basis may be an ideal strategy for Carey. Assume that Central City corn is going for $4.00 per bushel and December CME corn is trading at $3.75. The scenario is “25 over December,” and the local market is strong. To maximize returns, Carey can market this year’s crop while buying December CME corn; if the futures market rallies to reflect regional pricing, profits will be realized from both the cash sales and long futures position. If not, losses are manageable because robust cash sales outweigh losses taken from the long December CME corn position.

Interested in Learning More About the Ag Markets?

Basis? Over? Under? Without question, the agricultural markets have a language all their own. If you’re interested in learning more about the ag markets, a great place to begin is with a free consultation with an ag expert at Daniels Trading. Whether you’re a producer or a speculator, one of our market pros can help you get the most out of your grain-trading efforts.

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Filed Under: Ag Marketing

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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