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Veteran Contributor

Trying to understand basis.

Now basis in grains have widen in recent weeks because the current supply is high.  It is my understanding that gasoline supplies are high, gasoline futures have crashed this week, now trading at 1.92 (still way above the low of 1.40+ in 2009).  Yet basis is widening on gasoline at the pump......should not it be narrowing because they need to move supply?    A week ago cash price at the pump was about 40 cents over futures(still a high basis), today it is 70+ over. I see BP's Hayward is saying the Iowa Corn Farmer is the real problem in the gulf...he is going to have to add God to his list of villians...as more rain on the way,,,direct quick ship to the gulf.

And in the dept. of something I never thought I would hear.  Saw a clip from Oprah that her guest said that the producer (farmer) is not the reason for high food prices, because the cost of grains, etc., is such a small part in the price, most of the costs come from transportation and processing and mark up, etc.

Low fuel prices would do alot to stimulate this economy, but not BP's balance sheet.

 

And kudos to the Kansas wheat farmer who appeared on CNBC this morning.  Did a great job without hype or whining, you could tell the anchors really enjoyed talking with him, great job representing ag.

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11 Replies

Re: Trying to understand basis.

Hi jec,

 

Basis tends to do that as harvest looms. In corn I've been expecting some severe softness early as there is a huge amount of off grade corn sitting in commercial hands that needs to be blended with new crop.

 

Likewise with beans- basis has been living off of tight old crop but is starting to smell new crop supplies, which is normal. Doesn't mean there aren't going to be some hot quick ship bids if somebody gets caught playing it too close.

 

I wouldn't look at gasoline as "basis." As I understand it, the game for retailers is to try to hang on to pricing as long as possible in falling markets and to be the first to raise ahead of rising markets. Pretty much a local game based on competition or probably a dgree of tacit collusion.

 

Best, h

 

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Veteran Contributor

Re: Trying to understand basis.

To understand basis in grains you have to understand how bad the guy on the other end needs grain.  Most endusers and elevators are not flat price buyers, while most farmers are.  Overall it seems like basis widens when prices go up, and most people tend to think if price goes up basis will widen.  Really when price goes up and basis widens it is probably more a due to farmer selling then to the rise in price.  If you are an ethanol plant and you are buying more corn then you need your bid is too narrow.  Same thing happens when they can't get corn bought they will narrow until they do.  At the enduser level when things are tight your best bid is in the nearby, maybe Cargill Ray can answer this, but if you run an ethanol plant out of corn I think it is a pretty expensive mistake and you might not have a job the following day.  Also elevators and endusers will bid differently at historically narrow basis levels your elevator will most likely not be competitive with your enduser who needs grain everyday when basis levels are wide they will be.   Most farmers don't care if corn is -.20 basis or -.40 basis they are focused on weather corn is 3.00 or 5.00.  There are also some other things like carries and inverses that affect basis.  Say I am an elevator and the carry from Dec to July is at .40.  Someone would have to offer me pretty good basis in Dec to give up .40 carry.

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Veteran Contributor

Re: Trying to understand basis.

That is the way I have always understood basis.  But when using the current situation with gasoline, it is not 'obeying' the laws of basis. The price of fuel is a much bigger driver in the economy than the price of food.  Lowering fuel costs will stimulate the economy much quicker than lower food prices.  Many Americans, including myself, could live on a lost less food and improve our health while doing it.  Do you think that the grain buyers are passing all this great basis discount to the foreign grain buyers?  Have you seen the basis on beans for Oct to Dec delivery?  The bean basis I really can't understand.  There is no way I would sell new crop beans for 75 under.  So, you might say to lock in using a basis contract when basis is favorable.  The only problem with that program, is I know plenty of guys that used that for July corn del. and got burned because they were unable to hold for the Aug. rally.  A basis contract locks you into selling in a specific month.

With that said, if I was a grain buyer, I would try to buy it as cheap as I could. 

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Contributor

Re: Trying to understand basis.

Hey, crop and food prices are going much higher because we burn up 1/3 of the nations corn crop to make moonshine (ethanol) at a cost to the taxpayer of something like $7-$12 per gallon after considering subsidies on blending, crop production, grants, etc.  It may not be good for America, but its sure making us farmers a lot of money -- and that's what it's all about, right!  Hey, if you have a staple product that everyone needs like food the best way to increase the price is to just burn up all the excess inventory, that is what Purdue told me anyhow.

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Veteran Contributor

Re: Trying to understand basis.

Can't make any comments on fuel basis because basis is very commodity specific and also locations specific.  When you look at basis and foreign buyers I would have no idea how the system works but I would assume when a company is selling to a foreign buyer things like freight, and currency exchange make up a big difference in price.  As for bean basis no I wouldn't probably sell -75 either, but if you are going to make that bet I hope you have a bin.  Playing basis at harvest is a coin flip at best.  If basis at harvest is worse then it is now what are you going to do about it.  If you can store it usually there will be enough carry until the basis gets better to come out ahead.  If you can't store it in your own bin by the time basis get better your storage bill will be high enough to offset the gains.  As far as the guys that wrote basis contacts they could have bought futures if they really wanted to, not usually a good idea but this year it worked or they could have just wrote a basis contract for August if they wanted more time.

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Senior Advisor

Re: Trying to understand basis.

As I understand basis, it is really just the relationship between cash prices and futures prices. Futures prices are determined by the push and pull between traders as negotiations between longs and short determine price./

 

Cash buyers and sellers are negotiating to determine price where willing buyers and willing sellers can consumate an actual cash transaction. While futures prices may impact  cash bids it is really determined by what willing buyers and sellers can agree on. Thus if a buyer can buy at a lower figure he will and if a seller can sell at a higher figure he will. Competition is what keeps folks line on either side of the equation.

 

Of course merchants or commercials may lay off risk on the futures market or they may not be as aggressive in that they already have a high or low inventory or cash position.

 

So grain dealers,sellers and buyers are the real grain market. What can be negotiated in the real world at a given point in time. The futures trade is trading something else and is really just hedgers and speculators buying and selling  risk. Basis is merely the price difference between the two markets Basis may well fluctuate between different area according local supplies and freight costs to move supplie from areas of plenty to areas of where supplies are needed.

 

So neither markets are  wrong at any given moment. The establish prices are what they are. The relationship between the two (basis) will change as the cumulative forces demand.

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Senior Contributor

Re: Trying to understand basis.

e watcher, please provide some basis for your claim that ethanol costs the taxpayer 7 to 12 dollars a gallon. d7

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Frequent Contributor

Re: Trying to understand basis.

I'm thinking that years ago the basis never fluctuated as much as it does today. Is that because most CBOT points of delivery have been taken away.  The basis use to be thought of as the cost of doing bussiness. The basis for Oct corn in ILL near the Ill River is 40 cents. The basis has become a lot wider over the years. Why? It's kind of take what I give you attitude towards the farmer. When there were more points of delivery for CBOT corn there was a method to setting the basis. Doesn't seem to be that anymore. Then there is soybeans. The Basis is only 25 cents for this Fall and 7 cents for Jan. This seems more in line. There must be stong demand coming up gor those beans and the big boys want to maybe buy them up. Last year, I swear the basis was around 90 cents. Narrower basis, signs of a bull market! Some professional marketers would stress to sell when the basis narrows but I have found that is not neccessarely true. When the specs RUN the MARKET UP the basis usually widens out. Anyway it's time to go play a little Friday night poker. Everyone have a good weekend. 

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Contributor

Re: Trying to understand basis.

Interesting discussion.....a few  comments

 

1) There was no doubt that big board runs in 2007/2008 made the farmer lose some of his focus on traditional basis relationships....that's typical of a game-changing market, at least the first time......can you honestly say today that if somebody offered you $7 for corn you would care if the basis was -10 or -40?? That mindset was prevalent back 2-3 years....

 

2) This end of season basis market in corn is playing out far differently than many of us thought.....we spent all winter and spring knowing the farmer was holding lots of wet corn, and in spite of big month to month cash carries could never get the farmer to sell J/J/A slots until we got there......first we wondered if there was going to be a decent corn supply, then we wondered if it was going to be a saleable product......yes, we are rejecting 10-25 loads a day for damage, but there is a ready supply of corn available right now.....and average test weight is up to 56.4#....maybe they getting down to the two year old corn in some of these bins???  And yes, individuals and commercials are likely holding low quality corn that can only be sold at hefty discounts, if at all today, to be blended off in next 60-90 days...

 

3) As far as running big corn processing plants out of corn??  The old story in our business is that if the place runs out of corn, the next thing in the mill is the merchant......there is a really big fear in corn wet milling about having to slow/stop production in very cold weather......there is no auxiliary heat in the buildings, just the heat from equipment and the process that keeps temps above freezing....we had a major electrical outage 2-3 years ago on the coldest night of the year...some brave souls spent a lot of time trying to get some frozen conveyors running under very adverse condtions......

 

Here is how you know a corn mill is really in trouble----if/when they have two bids for the same day....one for delivery by noon, and the other for delivery by 8PM......closest I have come is being down to about 6-8 hours of flowable corn inventory...that's close enough for me!

 

Ray J

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