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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.

Request an Ag Planting Preparation Consultation

Filed Under: Ag Marketing

About Daniels Trading

Daniels Trading is an independent futures brokerage firm located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading is built on a culture of trust committed to the firm’s mission of Independence, Objectivity and Reliability.

Risk Disclosure

THIS MATERIAL IS CONVEYED AS A SOLICITATION FOR ENTERING INTO A DERIVATIVES TRANSACTION.

THIS MATERIAL HAS BEEN PREPARED BY A DANIELS TRADING BROKER WHO PROVIDES RESEARCH MARKET COMMENTARY AND TRADE RECOMMENDATIONS AS PART OF HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICITATION FOR TRADES; HOWEVER, DANIELS TRADING DOES NOT MAINTAIN A RESEARCH DEPARTMENT AS DEFINED IN CFTC RULE 1.71. DANIELS TRADING, ITS PRINCIPALS, BROKERS AND EMPLOYEES MAY TRADE IN DERIVATIVES FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS RISK TOLERANCE, MARGIN REQUIREMENTS, TRADING OBJECTIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNICAL VS. FUNDAMENTAL MARKET ANALYSIS, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE INITIATION OR LIQUIDATION OF POSITIONS THAT ARE DIFFERENT FROM OR CONTRARY TO THE OPINIONS AND RECOMMENDATIONS CONTAINED THEREIN.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS.

TRADE RECOMMENDATIONS AND PROFIT/LOSS CALCULATIONS MAY NOT INCLUDE COMMISSIONS AND FEES. PLEASE CONSULT YOUR BROKER FOR DETAILS BASED ON YOUR TRADING ARRANGEMENT AND COMMISSION SETUP.

YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU SHOULD READ THE "RISK DISCLOSURE" WEBPAGE ACCESSED AT WWW.DANIELSTRADING.COM AT THE BOTTOM OF THE HOMEPAGE. DANIELS TRADING IS NOT AFFILIATED WITH NOR DOES IT ENDORSE ANY TRADING SYSTEM, NEWSLETTER OR OTHER SIMILAR SERVICE. DANIELS TRADING DOES NOT GUARANTEE OR VERIFY ANY PERFORMANCE CLAIMS MADE BY SUCH SYSTEMS OR SERVICE.

GLOBAL ASSET ADVISORS, LLC (“GAA”) (DBA: DANIELS TRADING, TOP THIRD AG MARKETING AND FUTURES ONLINE) IS AN INTRODUCING BROKER TO GAIN CAPITAL GROUP, LLC (GCG) A FUTURES COMMISSION MERCHANT AND RETAIL FOREIGN EXCHANGE DEALER. GAA AND GCG ARE WHOLLY OWNED SUBSIDIARIES OF STONEX GROUP INC. (NASDAQ:SNEX) THE ULTIMATE PARENT COMPANY.

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Risk Disclosure

THIS MATERIAL IS CONVEYED AS A SOLICITATION FOR ENTERING INTO A DERIVATIVES TRANSACTION.

THIS MATERIAL HAS BEEN PREPARED BY A DANIELS TRADING BROKER WHO PROVIDES RESEARCH MARKET COMMENTARY AND TRADE RECOMMENDATIONS AS PART OF HIS OR HER SOLICITATION FOR ACCOUNTS AND SOLICITATION FOR TRADES; HOWEVER, DANIELS TRADING DOES NOT MAINTAIN A RESEARCH DEPARTMENT AS DEFINED IN CFTC RULE 1.71. DANIELS TRADING, ITS PRINCIPALS, BROKERS AND EMPLOYEES MAY TRADE IN DERIVATIVES FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS. DUE TO VARIOUS FACTORS (SUCH AS RISK TOLERANCE, MARGIN REQUIREMENTS, TRADING OBJECTIVES, SHORT TERM VS. LONG TERM STRATEGIES, TECHNICAL VS. FUNDAMENTAL MARKET ANALYSIS, AND OTHER FACTORS) SUCH TRADING MAY RESULT IN THE INITIATION OR LIQUIDATION OF POSITIONS THAT ARE DIFFERENT FROM OR CONTRARY TO THE OPINIONS AND RECOMMENDATIONS CONTAINED THEREIN.

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. THE RISK OF LOSS IN TRADING FUTURES CONTRACTS OR COMMODITY OPTIONS CAN BE SUBSTANTIAL, AND THEREFORE INVESTORS SHOULD UNDERSTAND THE RISKS INVOLVED IN TAKING LEVERAGED POSITIONS AND MUST ASSUME RESPONSIBILITY FOR THE RISKS ASSOCIATED WITH SUCH INVESTMENTS AND FOR THEIR RESULTS.

TRADE RECOMMENDATIONS AND PROFIT/LOSS CALCULATIONS MAY NOT INCLUDE COMMISSIONS AND FEES. PLEASE CONSULT YOUR BROKER FOR DETAILS BASED ON YOUR TRADING ARRANGEMENT AND COMMISSION SETUP.

YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES. YOU SHOULD READ THE "RISK DISCLOSURE" WEBPAGE ACCESSED AT WWW.DANIELSTRADING.COM AT THE BOTTOM OF THE HOMEPAGE. DANIELS TRADING IS NOT AFFILIATED WITH NOR DOES IT ENDORSE ANY TRADING SYSTEM, NEWSLETTER OR OTHER SIMILAR SERVICE. DANIELS TRADING DOES NOT GUARANTEE OR VERIFY ANY PERFORMANCE CLAIMS MADE BY SUCH SYSTEMS OR SERVICE.

GLOBAL ASSET ADVISORS, LLC (“GAA”) (DBA: DANIELS TRADING, TOP THIRD AG MARKETING AND FUTURES ONLINE) IS AN INTRODUCING BROKER TO GAIN CAPITAL GROUP, LLC (GCG) A FUTURES COMMISSION MERCHANT AND RETAIL FOREIGN EXCHANGE DEALER. GAA AND GCG ARE WHOLLY OWNED SUBSIDIARIES OF STONEX GROUP INC. (NASDAQ:SNEX) THE ULTIMATE PARENT COMPANY.

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