Understanding Basis and Futures

The cash equation

Understanding the fundamentals of grain marketing is so important to your overall success. In the grand scheme of things, the fundamentals are the easy part, because you still need to exercise judgment based on what the market is telling you, work a process to help keep your emotions in check, and understand your tolerance for risk.

At the core of it all are the two pricing components: futures and basis. You already know that the difference between futures and basis equals your cash price, or the final price you receive when delivering your grain. But in defining your success as a grain marketer, it’s very important to do more than sell in the spot market when you need money. Let’s take a look at why contracts matter.

 

Futures – Basis = Cash Price

 

Futures Market

The futures market is an organized marketplace where futures contracts are traded. It’s a place where buyers and sellers come together to establish prices for the futures delivery of a specific commodity. The buyers and sellers trade standardized contracts.

In other words, the futures price is really the most recently traded price where bids and offers come together in agreement at the relevant commodity exchange. The futures price represents the price of a specific grain and quantity, for a specific time period, and is influenced by global factors such as grain supply and demand, planting intentions, government actions, weather, crop conditions and more.

 

Futures months
 

  F (January) Soybeans, Canola

 G (February)

 H (March) Corn, Soybeans, Wheat, Canola, Oats

 J (April)

 K (May) Corn, Soybeans, Wheat, Canola, Oats 

 M (June)

 N (July) Corn, Soybeans, Wheat, Canola, Oats

 Q (August) Soybeans
 U (September) Corn, Wheat, Soybeans, Oats  V (October) 
 X (November) Soybeans, Canola

 Z (December) Corn, Wheat, Oats

 

 Contract specifications 

 1 Contract of Corn = 5,000 bushels,

 - 1 bushel of Corn = 56 lbs

 1 Contract of Wheat = 5,000 bushels,

 - 1 bushel of Wheat = 60 lbs

 1 Contract of Soybeans = 5,000 bushels,

 - 1 bushel of Soybeans = 60 lbs

 1 Contract of Canola – 4,409 bushels

 - 1 bushel of Canola = 50 lbs

 

Basis

Grain basis is the difference between the price of a commodity in the local market and the price of the commodity in the futures market. The basis will vary by regional activity, time of year and quality of your grain. It’s really important to understand the other factors that influence basis, including space availability, logistics, market carries and inverses, as well as the grain flows within your respective area.

In addition, wheat, soybean, corn and oat basis levels in Canada are impacted by the value of the Canadian dollar. Because canola is traded in Canadian dollars, currency is already factored into futures values.

There is an inherent volatility to the basis levels in your area. While there will always be some variability year to year, I’ve included a chart that can help you understand the calendar year, and what you might expect as far as the widening and narrowing of basis level in your area.

 

As you can see, the basis widens when there is an abundance of grain in the system, which generally aligns with harvest. Basis tends to narrow when grain companies are trying to fill their elevators in response to end user demand. But basis volatility doesn’t follow a set formula. Understand the grain flows in your area, and the factors affecting those local grain flows to figure out what is meant by a “good basis.”

Traditional grain contracts

There are many types of contracts to choose from when marketing grain. Which contract you choose depends on your cash flow needs, bin space, risk tolerance and profit levels. Learning how each of these contracts works will help you understand a variety of more complex strategies that enable you to spread out your risk and diversify your marketing plan.

  • Cash Price Contract
  • Basis Only Contract
  • Futures First Contract
  • Minimum Price Contract
  • Averaging Contract
  • Re-entry Contracts

Understanding the proper use and positioning of each of these contracts is vital. Talk to your local MarketSense advisor to find out more about the best solution for marketing your grain.

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