A market participant’s decisions on grain marketing, such as when and how to market grain, can have a substantial impact on the financial results of their operation. As a result, it’s important for producers and processors to develop a strong understanding of basis pricing for key selling/buying areas.
Basis, which reflects localized conditions, is stable relative to cash and futures prices that incorporate the volatility from global economic shocks. These localized conditions – expressed by basis seasonality - change over a longer time horizon and generally mean revert around medium-term cost curves.
Seasonality is one pricing pattern that is readily observable in basis information for a given area. In figure two, we see a clear relationship between the cmdty National Corn Basis Index (NCBI) across 2016, 2017, and 2018.
Despite covering the entire United States, the cmdty NCBI reflects patterns that are typical of basis pricing from a single location grain elevator operator. For example, the period of February through June – which is when producers are making planting decisions for the coming season – tends to see relatively strong basis as grain buyers price in uncertain supply.
Conversely, basis will generally weaken around harvest as supply is strong and carry/storage costs increase to reflect capacity constraints. These pricing patterns suggest that historical basis information is useful in forecasting future basis levels.
The key to using this sort of information is for users to develop a concrete understanding of what the historical basis has been for production and delivery areas sitting upstream of their businesses – and then be able to pull together a clear view of spot and forward pricing options that are available downstream.
In the most simplistic use case, if a firm is able to secure a basis price above what is typically found in that area given the time of year, then they can be reasonably sure that this is representative of good value on the sale. This is why accessing high-quality grain basis history is so important; it can significantly improve financial results through even the most simplified use case.
As individuals and firms build analysis competencies around basis data and get access to more robust tools– such as historical grain bid data and grain indexes from cmdty – they can leverage this information to identify whenever basis is out of its historical range in real-time, investigate possible reasons, develop a forecast for basis, and deploy a multi-tier grain marketing strategy to maximize profit.
Essentially there are two major use cases for historical basis information: 1) buying or selling local grain based on strength or weakness in current basis relative to prior trends, or 2) building a forecast for basis expectations and optimizing which strategy to employ. In either use case, cmdty Grain Basis Indexes can simplify your workflows.
In the example seen below, we examine a practical use case for scenario 1 – which is buying or selling local grain based on strength or weakness in current basis relative to prior trends. The area in question is District 5, or Crop Reporting District (CRD) 50 for USDA reporting purposes, in Iowa.
This district was chosen because it produced the most corn among nine Iowa CRDs for the year 2017. Iowa was also the state that produced the most Corn in the United States in 2017.
In Figure 5 we observe Basis in the front-month that is quite strong relative to historical trends – with it $0.09 over the 2016-2018 average for the same period historically. For producers, this represents a good opportunity to sell Corn that is on hand. For a speculator, this would be a strong opportunity to employ a spread trade by selling spot inventory and buying a forward for delivery around harvest 2019.
Within this rather simple example, it’s clear that streaming basis indexes for spot and forwards from cmdty make it simple for end-users to make better decisions that increase profit for their operations.
As the leader in workflow solutions for agriculture, cmdty by Barchart has unparalleled insight into physical grain markets and best-in-class cash grain prices from over 4,000 grain buying locations across North America. Our solutions power single location elevators, through to the largest grain buyers around the world. To learn more about any of our services drop us a line at email@example.com or reach out here.