PRICE MAKER BASIS CONTRACTS
Recommendation: Nov. Bean Basis Contracts
For those of you that have basis contracts against the November futures, we recommend that instead of rolling you sell and re-own with futures in a hedge account.
From my experience, if you didn’t get grain priced before the expiration deadline on a basis contract and you have the option to roll to the next month, you should price the grain and re-own with futures.
If your new to using basis contacts you want to make sure not to fall into the trap of rolling into a carry market. Many times elevators advertise basis contacts instead of making cash sales. This is true basis contracts have a time to be used, but if you find yourself in the situation where you are now forced to roll or price, you have reached the time when it no longer makes sense to utilize a basis contract.
The time to utilize basis contacts is when one has an inverted market, when you have a carry market such as November to January soybeans, when you roll all of the sudden your basis isn’t as good as it was.
Let's take an example of one having a zero basis contract. If you are forced to roll or sell, your zero basis now becomes -22 under the January futures. Which in it self isn’t the worst thing ever. But let's say via the buyer allowing you to roll you decide not be proactive enough and find yourself at the end of December being told to either price or roll.
If that was today you would then see a basis of -36 under.. Your zero basis contract doesn’t sound quiet as good now.
What happens if you decide to treat the basis contract like a bin that you forgot about. If you roll again and roll out to July now your zero basis is -57 under if your buyer is not charging you much for roll fees. But for most of you your zero under basis contract is not closer to -65 to – 70.
So our number one reason that we want to price out all basis contracts once the grain is delivered and re-own with futures or option strategies is that farmers who typically roll basis contracts end up falling into a grain marketing trap and end up rolling and rolling, until eventually they become a price taker. Via having a basis contact that is delivered without the futures priced one tends to be complacent on marketing.
So to be clear our recommendation isn’t to sell the beans and close the book on your 2023 soybean marketing. Our recommendation is to price the basis contract and simultaneously buy futures in a deferred month that aligns with your grain marketing plan strategy.
Buy futures? Why would I buy futures some will say. Others will comment isn’t buying futures Texas hedging.
My response is that once basis contracts are fulfilled farmers are already long futures, they just no longer have control nor do they have the cash for the soybeans.
What happens when a buyer does a basis contract with a farmer typically looks something like this. Farmer sells 100,000 bushels of soybeans at a zero basis. Elevator sells 100,000 bushels of soybeans to an end user. At the same time the elevator then buys long November futures. When the farmers prices the basis contract the elevator then sells the 100,000 futures of November futures.
If the farmer choose to roll the contract, the buyer sells his long futures and buys the month he rolls the contract to.
So as the markets go up and down the elevator watches the hedge account go up and down. At www.dailymarketminute.com we turn farmers into price makers instead of price takers. Via pricing basis contracts when delivered farmers become just a little closer to being a price maker with these couple benefits that you will experience.
First off if an elevator sell soybeans to an end user, they get paid for them. Via not pricing the basis contract we allow the elevator to utilize cash flow as the elevator takes your money puts it into their bank account and then buys futures in a hedge account.
Benefit of pricing basis contacts as delivered if not prior. $$$$$$ CASH FLOW. Why would you let the elevator use your money? Are they really that nice of a company? Do you like paying interest expenses while someone else uses your money?
An even bigger benefit of pricing your basis contracts as delivered if not prior to delivery is what it does to your grain marketing style, when you open a hedge account. It makes you much more proactive. Because instead of watch soybeans go up, and then go down, and then go up, etc. You now get a call from someone like me saying that need to send in a margin call because the market has went down. Or I call you up and say that your trade has made you X number of dollars and I talk you into taking profits on some or all of your long futures position.
And for a few lucky ones that historically sell right before the market goes up, now find themselves selling after the market goes up. Then rebuying when the market goes back down. All of the sudden they magically start to buy low and sell high. The pressure that the hedge account does from worries associated with margin calls now acts as a benefit in making the farmer much more proactive.
The next thing that typically happens is the farmer slowly starts utilizing options and future spreads to help create even more flexibility and comfort in the volatility associated with grain future markets.
If you don’t agree with my logic on why one needs to price basis contracts once delivered and re-own with futures. Ask yourself do any elevators ever do basis contracts with end users whereas they don’t price the futures prior to delivery or as the grain is delivered?
If you want to become a price maker you need to do what buyers do. Farmers are much bigger in operation size then 20 years ago. Farmers grain marketing styles should be similar to what elevators and end users utilize. If the buyer doesn’t utilize the grain pricing tool, neither should you. Because if you are utilizing a tool such as rolling basis contracts after delivered or something such as delayed price you remain a price taker.
Become a price maker today and take the little edge that the buyers have added, back.
If you need help opening a hedge account to help you become a price maker call Wade at 605-870-0091 or Jeremy at 605-295-3100
You can also open one here.