UNDERSTANDING BASIS

Written By Sebastian Frost

A Comprehensive Guide to Cash Grain Marketing

When it comes to cash grain marketing, the term "basis" is often used, but what does it really mean? Let's take a closer look at the definition and the factors that influence this important concept.


Defining the Basis:

In general, the basis refers to the foundation or fundamental principle of something. However, in the context of cash grain marketing, it specifically refers to the difference between the futures market and the cash market.


Factors Affecting the Basis:

Calculating the basis is not a straightforward process. It involves a variety of factors that merchandisers take into consideration. Here are some of the most important ones:


  1. Margin:

Elevators need to make a profit, and they consider their break-even margin when determining the basis. This includes factors like operating expenses, employee salaries, utilities, and maintenance costs. They also factor in any upcoming upgrades, such as new bins, faster legs, or better rail spouts. Ultimately, they aim to make a profit that will keep investors happy and farmer-owners satisfied.

2. Logistics:

Transportation costs are a variable cost that affects the basis. Rail cars and semi-trucks are expensive, and it costs a lot of money to transport grain from the middle of the country to the ports. Domestic crush facilities, mills, and ethanol plants also have freight costs that they pass on to elevators. Logistics are especially volatile, and unexpected events like blizzards and road closures can affect space availability.

3. Supply and Demand:

Supply and demand play a major role in determining the basis. When something is plentiful, the basis will be affected, and when something is scarce, the basis will be affected as well. Elevators will be reluctant to offer a favorable bid for wheat bushels during corn harvest, but an ethanol plant that relies on a specific number of bushels each day may offer limited-time bids to encourage hauling during times of increased demand.


4. Keeping Up with the Competition: How Merchandisers Stay Ahead

Elevators are always looking to stay competitive and offer the best possible bids to farmers. They will often monitor their competitors' bids, both public and private, and adjust their calculations accordingly. However, abnormal moves by competitors can pose more questions than answers

5. Spreads:

Spreads are an important concept in cash grain marketing that affects the basis. A spread is the difference between two traded commodities, and for our purposes, we will focus on calendar spreads, which refer to the difference between two trading months for the same commodity. Understanding spreads is crucial to understanding the basis, as it is often lumped into the basis but deserves its own category.


Conclusion:

The basis is the foundation of cash grain marketing, and understanding how it is calculated is crucial to making informed decisions. Elevators consider a variety of factors when determining the basis, including margin, logistics, supply and demand, competitive edge, and spreads.

Sebastian Frost
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