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sw363535
Honored Advisor

basis contracts. ----example of how I use them.

since the turn of the trend in January we have had the best example I have seen for a while of the reason for the use of basis contracts.  I will use corn as the example locally.  We make a distinction between grain merchandisers(elevators, coops,etc) and end users(cattle feeders, Hog feeders, dairys, and ethanol )  There is normally a 40-50 cent bonus to the producer who can deliver.  Lets call this Basis2.  Basis1 being the normal basis of the merchandiser in relation to the futures price.  Keep in mind it is a personal choice of each merchandiser and Basis2 is a personal choice of each end user, reflecting their "need" for grain.  Once contracts are in place the "need" is reduced.

thoughts------

We have a need to start moving inventory into the usage channels locally in order to insure a chance at a good Basis2.  If we contract grain for delivery earlier than January/feb. price is under harvest pressure and end users are still working through their harvest inventory .  If we wait until June or July we may find that the end users have plenty contracted to get them to new crop in September/October---- as well as price being under pressure from the new crop growing in the field.  ---- the window of opportunity for Basis2 in a grain deficit area.

 

The point ----------- 

Notice how corn made the turn in January and came up 10-20 cents in the first 2-3 weeks and within days the basis1 started to loose position.  In fact by the end of february basis1had slipped enough to take away at least half of the increase since the turn.

  I try to make a basis contract to lock in the best basis2 I can get, to be priced on or before delivery.  Even if I intend to price in the next few days.  I feel this takes away a tool for the end user to trim a few cents off the contract price no matter where the futures go.

A contract to be priced later without locking in a basis will see negative basis move more often than not.

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4 Replies
Jim Meade / Iowa City
Senior Advisor

Re: basis contracts. ----example of how I use them.

You compare it with a price later contract.  Why would anyone use a price later contract, given the other marketing tools we have? 

 

Are you treating basis 2 as a separate price determination than basis 1 - even though they may sometimes look the same?  If so, they are not additive.

 

Like you, I have feeders and ethanol plants plus I have exporters and processors, but I have not tried to differentiate between them on basis, except whose is higher.

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farmerguy89
Advisor

Re: basis contracts. ----example of how I use them.

It's really close on basis now.

There are other things to consider though.

The local elevator skims 1-2% of my beans in dockage. The river takes nothing usually. They allow me 2%, the crusher is 1% but with better hours..

5-11/t beans is enough to stay away from the elevator.

There are some areas that do require more corn than others, and basis reflects that.
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sw363535
Honored Advisor

Re: basis contracts. ----example of how I use them.

You compare it with a price later contract.  Why would anyone use a price later contract, given the other marketing tools we have? 

Often the end users "need to contract" does not coordinate with a taditional pricing time.  Example --In December,  A large feeder may have excess purchased grain from harvest purchases, but cannot get anyone to committ to deliveries in March/April because prices are still under harvest pressure.  By february/Mar/ Apr he is bidding up to fill his March/apr needs.  If one waits for the bid up, many  pr large competitors were waiting as well.  A december Basis contract secures a place in line in March without having to sell on the weaker december market. --------- A seasonally, historical, move to capture a spot in a market not normally available.

 

 

Are you treating basis 2 as a separate price determination than basis 1 - even though they may sometimes look the same?  If so, they are not additive.  The basis2 ---end user market is a window of opportunity in place for 6 months between harvest surplus and anticipated harvest surplus.  Basis1 is the middle man basis which is always available--- local coop.  The difference between the two basically is the middleman profit.  In a grain deficit area like ours the local quality grain will draw some or much of that markup for a few months when end users are looking for grain.

If you are in an area that never has to bring it in from other areas, an individual porducer may never get the opportunity to do so. Or those margins---often related to the long distance freight may not exist.

 

Like you, I have feeders and ethanol plants plus I have exporters and processors, but I have not tried to differentiate between them on basis, except whose is higher.  The difference for you, and the consistance for you,  might not be big enough to go after differently than you are.  

I am just presenting it for thought

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sw363535
Honored Advisor

Re: basis contracts. ----example of how I use them.

Jim it is a problem for me when commenting on the forum.  Our location is unique enough that I tend to leave out issues or info and sometimes avoid topics.

But I think a producer should be reappraising his area every couple of years.  We have made some big changes in the way we market and use grain and marketing opportunities change as well.

 

 

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