BASIS CONTRACTS
TIPS FOR BECOMING A PRICE MAKER
Here are some tips to become a price maker from www.dailymarketminute.com
Make sure to check out some other audio comments on tips to become a Grain Price Maker. You can do so HERE.
Farmers need to separate cash price into basis and futures. That them the final cash price.
When doing a basis contact I want to consider the following
Historical Basis
Locally
Regionally
Nationally
World Wide values
Future Price spreads - The price difference between March and May as an example.
Carry Futures Markets equal wider basis when rolled
A carry market is bearish because the market is saying they don’t need the product right away.
The market is offering to pay one to store the grain.
Inverted Futures Markets equal narrow or better basis when rolled
An inverted market is bullish because the market wants the product today, and will pay more for it today then they will later in time.
Price where the grain ends up being processed or used at.
You should be able to know the buyers margin
Help keep prices at fair levels
Basis at areas surrounding your area.
Buyers have always been considered Price Makers in reference to the prices farmers get. But why is that? As a farmer trades/sells his grain like buyers do, it narrows the edge that the buyers have over farmers.
Take a look as farmers expand, eventually they start by passing the elevators for various small grain commodities.
When one separates cash price into basis and futures and does the futures position in his own account he has taken away fee’s and leverage from the buyer.
When is the proper time to utilize basis contracts? Typically NOT AT HARVEST. You want to typically do basis contracts when supply is tight. When the market is inverted between old crop and new crop locking in basis is strongly recommended at some point.
There is nothing wrong with doing a basis contract for harvest should you have a pro-active plan to price the futures portion and it is recommended that one utilizes own hedge account to do that. I will touch on why below.
When basis contracts have been delivered on the contract needs to be priced, if not previously prices, and one needs to utilize futures and options to establish his final net price
Interest expense
It makes farmers much more proactive. Otherwise when farmers do basis contracts in carry markets they tend to roll and roll making the basis much wider
Reason number 3 is the education and experience that comes with futures helps one on the goal of becoming a price maker much more quickly
Basis contracts when delivered have no protection in most states should buyers go belly up
Basis contracts are selling the grain, so get paid for it and use your own hedge account so that you learn and grow in grain price risk management.
Tax benefits
If one has a basis contract that goes up the gain is considered ordinary income, whereas long futures is usually considered a capital gain
20% aprox tax savings
You don’t own the grain anymore, so why not get paid and price it like a big boy?
Farmers get bigger and smarter. Each year. Buyers when buying from other buyers doing basis contracts price them at the point of delivery. Because it just simply is how to operate.
If you want to become a price maker, get yourself a hedge account opened up and the next time you do a basis contract and don’t get the futures price prior to delivery. Price it and utilize your futures account to get the net price you are looking to achieve.
To open a hedge account give me a call at 605-295-3100 or click HERE
DON’T DO A BASIS CONTRACT IN A CARRY MARKET WHEN YOU WILL HAVE TO ROLL. That is a mistake, if you have too much money, give some to the Church or somebody in need. Don’t give BIG AG more money.
Reasons to do a basis contract. Become a price maker.
Already have futures priced and trade basis
Inverted cash market
Inverted futures market
Historically strong basis ( Along with plan on how you will price futures, and a backup plan should you not get futures priced at desired level)
These are NOT reasons to do a basis contract. These are ways to stay a price taker.
I don’t like the price
I am out storage and don’t want to sell
My buyer said it would get much worse
Take a look at these 4
Rolling an HTA in a Carry Market:
Rolling a Basis in a Carry Market:
Rolling an HTA in an Inverted Market:
Rolling a Basis in an Inverted Market:
These 4 tables serve as a guideline as to what to do in the various markets to get the best net price on a given day.
When you have a HTA, if you roll it at a carry your price gets better. BUT DONT ROLL AT AN INVERSE.
If you have a basis contact and you roll it when the market is inverted your basis improves. BUT DONT ROLL IT AT A CARRY.
Four very different situations that must be understood if one ever wants to become a price maker. Keep in mind that it not only is the situation when you enter the trade, but when you are wanting to roll. So have an opinion on what will happen to the spreads before you get to the time when you have to price or roll. Be proactive enough to control your prices you get.
To get more in-depth information on future spread and the implications to prices that a farmer receives please feel free to reach out to me at 605-295-3100.
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Here is a market update where I talk about seperating futures and basis: