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Understanding Basis and Price Formation in Grain Markets

Basis refers to the difference between the cash price at a specific location and the price of a futures contract. It is crucial for grain producers as it affects marketing strategies based on local conditions. A weaker basis signifies a lower cash price relative to futures, favoring cash buyers but disadvantaging sellers. Conversely, a stronger basis benefits sellers due to higher cash prices. Key determinants include storage and transportation costs, local supply and demand, grain quality, and competition. Tracking historical basis levels aids in understanding market trends.

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Understanding Basis and Price Formation in Grain Markets

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  1. Basis and Price Formation

  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. The lower the cash price relative to futures prices, the weaker the basis. A weak basis is good for cash buyers,and bad for cash sellers The higher the cash price is relative to futures, the stronger the basis. A strong basis is bad for cash buyers,and good for cash sellers. Basis Changes

  4. 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.

  5. Determination of Basis Other Factors: • Local supply and demand conditions • Grain quality • Intensity of local Competition

  6. 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.

  7. Odessa Washington White Wheat Basis

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