1. 1 Basis and Price Formation

2. 2 Basis Basis is the difference between a cash price at a specific location and the price of a particular futures contract. The cash price offered to a grain producer for any given marketing strategy is a function of local basis.

3. 3 Determination of Basis Major Factors COST OF STORAGE: Determines basis over a given crop year. Also affects the price difference between a nearby and a distant futures contract in a given crop year. COST OF TRANSPORTATION: Determines basis geographically.

4. 4 Determination of Basis Other Factors: Local supply and demand conditions Grain quality Intensity of local competition

5. 5 Basis Basis = Cash-Futures Price ( or Futures - Cash Price) Calculated From Nearby Futures (Cash - Next Futures Contract to Mature) Has Predictable Patterns (More Predictable Than Cash Prices) Not Perfectly Predictable (Basis Risk) Determines the Success of Hedge

6. 6 Two Types of Basis Time Basis: Cash Price Less Futures Price Zero at Contract Maturity Location Basis: Chicago Cash Price Less Your Local Cash Price “Localizing the Basis”

7. 7 Strengthening and Weakening Basis Strengthen (less negative or more positive) Weaken (less positive or more negative) 0 -10 -20 10 20 Cash prices increase relative to futures prices Cash prices decrease relative to futures prices

8. 8 Typical Grain Basis Pattern Summer SpringFall Harvest Futures Price Cash Price Weakening Basis Strengthening Basis Harvest Basis Largest

9. 9 Predictable Basis Patterns Futures > Cash Prior to Contract Maturity Futures = Cash Price at Contract Maturity Basis Widens Into Harvest Basis Narrows During Storage Season Futures and Cash Prices Move Together Basis is Predictable From Year to Year

10. 10 Hedging Principle The Basis Determines the Success of A Hedge

11. 11 Basis and Storage Costs $ Fall Harvest Spring Basis Storage Costs Futures Price Cash Price P harvest

12. 12 Date Cash Market Futures Market October Harvest Price = $3.00 Sell July Fut. = $3.50 Est. June Basis = $.10 Storage Cost = $.30 Forward Price = $3.50-.10= $3.40 Storage Profit= $3.40 -3.00 -.30= $.10 June Cash Sale @ $3.30 Buy Back Fut. @ $3.40 Return to Hedge: $3.30 + $.10 = $ 3.40 Corn Storage Hedge

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17. 17 Recording Basis To record historical basis levels, collect closing futures prices for the contract closest to maturity (but not expiring in the current month) each Wednesday, and the corresponding cash price (collected later Wednesday or Thursday morning). Subtract the futures price from the cash price. Average the Wednesday basis calculations for each month to arrive at the average monthly basis level.

18. 18 Finding Local Basis Information Compile it yourself over several years. Contact you local county extension office. Contact your local grain brokers, lenders, market advisory services.