September 25, 2023
UNERSTANDING BASIS IMPORTANT FOR GRAIN MARKETING DECISIONS
On any given day, farm operators and others can get grain price quotes from the CME Group, also known as the Chicago Board of Trade (CBOT), in “real-time” on their computer or I-phone. Almost as quickly, they can get current and future corn and soybean market price quotes from local grain elevators, ethanol plants, and processing plants. The difference between the local grain price and the CBOT price is known as “basis”. Understanding how basis works and the seasonal trends associated with basis can be an important factor in making corn and soybean marketing decisions.
More specifically, “basis” is the difference between the local grain price quote on a specific date and the CBOT price for the corresponding futures contract month. Local harvest price quotes for corn and soybeans would correspond to the December CBOT corn futures price and the November CBOT soybean futures price. By comparison, storing the corn or soybeans after harvest and selling the grain via a forward contract in June or early July the following Summer would have the basis level determined by the July CBOT corn or soybean futures.
A “narrow” or “tighter” basis means that the local corn or soybean price is nearer or getting closer to the corresponding CBOT price, while a “wide” or “widening” basis reflects local grain prices that have a greater margin below the CBOT prices. In most instances, farmers in the Upper Midwest deal with “negative” basis levels, which means than local corn and soybean prices are lower than the corresponding CBOT prices. Areas near the Mississippi River ports or in the Southern U.S more typically have “positive” basis levels, where local grain prices are actually higher than CBOT prices. However, there have were also several areas of the Upper Midwest that have had “positive” basis levels for corn and soybeans at certain times during 202 and 2022..
While the definition of basis may seem quite simple, the dynamics of understanding basis can be quite complex. Basis is variable at different locations and can vary throughout the year, or suddenly be adjusted due to changing dynamics in grain market fundamentals. Following are the main factors that affect basis and can lead to changes in basis levels:
- Geographic Variations— Corn and soybean basis can vary greatly from location-to-location, largely dependent on the amount of the local grain production to be used as livestock feed or for use in processing and ethanol production. Therefore, basis levels tend to be wider in Western Minnesota and the Dakota’s than in Southern Minnesota, which has a high amount of livestock production, as well as several ethanol plants and soybean processing plants.
- Transportation Costs — This is the cost of shipping grain from the point of local sale to the final destination point, whether it be for use within the U.S. or transported to the ports to be shipped for exports to other countries. For example, areas that utilize a large percentage of the corn and soybean production in the local area have less grain to be transported to the ports or to other portions of the U.S. In addition, being closer to the Mississippi River, an important port, or a major rail line tends to reduce transportation costs and result in tighter basis levels.
- Supply and Demand — The overall U.S. grain supply, based on crop production in a given year and grain carryover levels from the previous year, along with the grain usage for livestock feed, processing, ethanol production, and exports, can result in year-to-year variations in basis levels. For example, the 2021 and 2022 corn and soybean basis levels in many areas were tighter than normal due to the strong demand for exports to China and increased domestic demand for livestock feed and processing. However, with increases in and corn and soybean acreage, along with projected reduced demand and export levels, basis levels have widened out to more typical “harvest-time” basis levels by the Fall of 2023.Poor crop yields in a local area can also affect the local basis level in a given year.
- Storage and Interest Costs — In a normal year, both CBOT corn and soybean futures prices and cash prices tend to be the lowest at harvest time and then increase by the summer months in the following year. As the time gets closer to the actual date of delivery for the grain, the storage and interest costs typically decrease, and the basis tends to narrow; however, this does not always occur. At times during the summer months, depending on demand, the local grain prices may be stronger than the CBOT prices, which may result in tighter basis levels. This was the case in 2021 and 2022, when a combination of lower-thanaverage crop yields, together with strong demand for corn and soybeans, kept basis levels fairly tight in many portions of the Upper Midwest. However, this scenario has changed in the second half of 2023.
There are many grain marketing tools available for farm operators to utilize in addition to cash sales, including a variety of hedging, options, and basis contracts, Generally, a hedging or options contract locks in the CBOT futures price, but not the cash price, meaning that the farmer still has basis risk. For example, a “hedge-to-arrive” contract locks in a CBOT futures price but does not finalize the basis until the futures contract is cleared and the grain is actually sold at the local level. By comparison, a basis contract locks in the basis but keeps the final price open depending on changes in the corresponding CBOT futures price and actual cash price at the time of delivery.
The current 2023 basis levels for corn and soybeans in Southern Minnesota are more typical of “harvest-time” basis levels prior to 2021 and 2022 than in the past two years The current corn basis in the region ranges from about $.30 to $.60 per bushel under the CBOT December corn futures price, while the soybean basis ranges from about $.60 to $.90 per bushel under the CBOT price, with tighter basis levels at soybean processing plants. As mentioned earlier, the 2023 late September harvest basis levels for corn and soybeans are similar to basis levels from 2015-2020 in Southern Minnesota. During 2015-2020, the local corn basis level in Southern Minnesota by the following June improved in three years and widened in three years. Soybean basis levels improved in five of the six years, with an average improvement of less than $.10 per bushel.
The return to wider “harvest-time” basis levels for corn and soybeans during the 2023 harvest season is certainly something to factor into post-harvest grain marketing decisions in the next few months. If corn and soybean futures prices rally after harvest season and basis levels remain quite wide, it will likely encourage the use of more “hedge-to-arrive” contracts for the summer months of 2024. This will allow producers to reduce their “price risk” on the stored grain, while still being able to take advantage of potential basis improvement that may occur between the post-harvest months and the Summer of 2024.
Most grain marketing strategies, including storing unpriced grain in a bin on the farm, involve some level of price and/or basis risk. Understanding the dynamics of basis in corn and soybean market prices is a key element in analyzing the various types of grain marketing contracts that are available to farm operators. Iowa State University has some good information available on understanding basis and various grain marketing strategies. This is available on the “Ag Decision Maker” website at: https://www.extension.iastate.edu/agdm/cdmarkets.html.
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Note — For additional information contact Kent Thiesse, Farm Management Analyst and Sr. Vice President,
MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960)
E-mail — kent.thiesse@minnstarbank.com) Web Site — http://www.minnstarbank.com/