Originally written by Roger Wright for FarmProgress.com in September 2021
Here is why you need to be a basis seller and a futures seller, not a cash price seller to increase profit for your corn, soybeans and wheat.
The two factors that determine your net cash price for grain are basis and futures.
I want you to be looking for the day of the year when:
Basis is most likely as firm as it will get for your delivery period.
The futures price is as close to the high for the year as one would reasonably expect.
Those two things will never occur on the same day. Why?
Most farmers are cash price sellers. They look at the cash price to decide when to deliver grain. If a farmer is looking for $13 soybeans, he or she is not looking at a specific futures price or a specific basis. When he can get $13 cash price, he will price his beans for delivery.
Merchandisers, on the other hand, are basis marketers. Making money on the basis change is a primary profit center for them, and it should be for you. Every penny a merchandiser makes on basis change is a penny a farmer could have had in his pocket.
The basis for your grain will usually be firmest when the return to storage is a negative number - a losing proposition. Farmers are the only people in the world who store grain and soybeans at a loss because they are cash price marketers.
When there is a negative return to storage, farmers need to set the basis for desired delivery period. That decision to set the delivery date by locking in the basis should have nothing to do with when you lock in the futures price.
Basis and futures are two different markets. One is a function of local supply and demand and the other is a function of world supply and demand. They peak on different dates every year and they bottom on different dates every year.
The futures price is out of everyone’s control, but basis is set by your merchandiser. Basis is the “throttle” merchandisers use to regulate the quantity of grain moving into their facility.
If the cash price is so low that farmers are not selling as much grain as a merchandiser needs, she will firm basis to increase the cash price high enough to attract more bushels. Three weeks ago, Cargill’s corn sweeter processing plant in Dayton, Ohio increased its cash price by $1.08 per bushel. The futures price was down 7 cents that week. Cargill firmed its basis for nearby delivery
by 115 cents per bushel in one week! (Gosh, do you think they were needing corn?) They shoved that “throttle” (basis) forward to increase the flow of corn into their facility.
You are thinking, “But, but, but… if I deliver my corn on a firm basis, which implies futures will be weak, how am I going to price my corn when the futures price is near the top?”
Basis contract, minimum price contract, sell cash and buy futures. All of those keeps you in a position to make money if futures go up.
Each year is different. Some years, the firmest basis is long before the futures high is made and other years the futures high is long before the basis peaks. If you look only at cash price, you will miss both of those peaks.
You do not need a futures account to separate pricing the futures on a different day than the basis.
A basis contract at your elevator locks-in the basis.
A Hedge to Arrive (HTA) contract locks-in the futures price.
Work at becoming a basis seller and a futures seller. They are two different markets and they usually move in opposite directions.
If you quit being a cash price seller and become a basis and futures seller, you could easily add 10 to 20 cents per bushel each year, probably much more. It is easy money and it costs nothing!
A farm example: Corn 2021
Arlen, a farmer in Kansas, called me last week and said his basis for fall delivery was 35 cents firmer than the basis for December delivery. He wanted me to confirm he was thinking correctly that the market was telling him to deliver corn at harvest and not store it. I told him that was exactly what his local market (basis market) was telling him.
Arlen will set the basis now for fall delivery. He will leave the future price open with the merchandiser. When he is finished delivering the corn, he will lock in December futures with his merchandiser, which will be coupled with his 15 cents over the December basis contract. That will determine his cash price with the merchandiser.
After fixing his cash corn price with his merchandiser, Arlen will then call his futures broker and buy the same number of bushels in the futures market. When corn futures price gets close to the top, Arlen will call his futures broker and sell his futures contracts.
If Arlen sells his futures contracts for a higher price than he bought futures, that profit will be added to his net cash sale of 15 cents over December. If Arlen sells futures at a loss, that loss will be subtracted from his net cash sale at 15 over the December futures. In either case, he greatly benefitted from what will most likely will be the firmest basis of the new crop marketing year.
On the other hand, if he puts the corn in the bin, he loses that 35 cents and he still gains or loses whatever the corn futures price does in the coming months and he would not have use of his money while the corn is in the bin.
A farm example: Soybeans 1988
There were five Corn Belt wide droughts in the Twentieth Century, 1934, 1936 and three of the, in the 1980’s. The last one was in 1988. Near the end of 1987, The Ohio Grain Company in Mechanicsburg, Ohio was bidding 30 under the November 1988 futures for fall 1988 delivery, or about $5.60.
The day November 1988 beans made its contract high on June 23 rd , Ohio grain was bidding 80 under the November futures.
The last week of October, Ohio Grain was bidding 15 over the November futures. If a farmer forward contracted his beans at the very top of the futures market, his net cash price would have been, $9.66.
If a farmer contracted his beans at the very top of the basis market, his net cash price would have been $7.65.
If he locked in the futures price with a HTA contract at the very top and locked-in basis at the very top, his net cash price would have been $10.61.
Take a look at those three prices: $9.66, $7.65 and $10.61. What would it have cost him to get that top of the futures and the top of the basis? Not one red cent.