Apr 3 2020
Understanding Basis In Relation to Grain Prices
Basis is a concept used throughout financial and commodity markets. Most simply, it represents the spread between two related instruments and is most commonly used to express the relationship of cash and futures products.
Within financial markets this basis relationship can typically be explained by two components: interest rates and income streams. Using equity indexes as an example, the basis, or difference between a security basket and the associated index future, is the sum of interest income on the cash required to hold the basket position, less the lost dividends that futures holders do not receive.
Fixed income and forex markets have similar relationships that exist between the futures and spot prices – which are well regulated by arbitrage forces.
While similar to financial markets, the variables impacting commodity basis are both magnitudes greater in number, and considerably more area- specific due the multitude of factors that impact delivery of a physical position against a future.
Where futures tends to reflect global macroeconomic factors for financial markets, basis effectively localizes prices for commodities with respect to location, time, and quality.
Many factors can affect the basis in a location including local, national, and international supply and demand, quality of the commodity, transportation costs, storage availability, and seasonality patterns. We will explore this relationship in grain markets.
With the variables impacting grain prices differing so much from location to location, it is intuitive that basis will vary from one location to the next.
When there is a grain shortage in an area, the local cash grain price will increase relative to the futures price –strengthening basis. If there is a surplus of supply in a specific area, the local cash price will decrease relative to futures – a weakening basis.
If the costs associated with loading and delivering a barge of grain from Iowa to the Gulf increase substantially, this will manifest itself in a weaker/more negative basis for grain processing buys in Cedar Rapids as additional margin is required to prepare the goods for export.
Regardless of whether it is strengthening or weakening, it is important to note that basis can be positive or negative. For example, basis closer to the Gulf tend to be positive, while grain basis in areas of production across the Midwest, with carry costs to export terminals, tends to be negative.
The cmdty Grain Index Family is a series of continuously calculated volume weighted Basis indexes and Cash Price assessments that represent fair values of physical grain. Available historically and as a twelve-month forward curve for each calculated area, fair values are calculated for Corn, Soybeans, and Wheat.
Consideration with regards to facility capacity, utilization, and throughput is given to more accurately provide a market clearing price for a given geographical region. For each commodity product within the cmdty Grain Index Family thousands of indexes are calculated at the following levels: County, Crop Reporting District, State, Region, and National.
Our solutions power single location elevators, through to the largest grain buyers around the world. Users can access the cmdty Grain Index Family through Barchart OnDemand APIs, the flagship cmdtyView® data platform, or the powerful cmdtyView Excel add-in.