Understanding 'Basis' Important in 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, or even possibly above the CBOT price, while a “wide” or “widening” basis reflects local grain prices that have a greater margin below the CBOT prices. In most instances over time, farmers in the Upper Midwest have dealt 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. Since 2021, several areas of the Upper Midwest have also had “positive” basis levels for corn and soybeans on numerous occasions.

While the definition of basis may seem quite simple, the dynamics of understanding basis can be quite complex. Basis is widely variable at different locations on a given day, and basis 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 Iowa or Southern Minnesota, which have 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 for 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 have been tighter than normal due to the strong demand for grain exports and increased domestic demand for livestock feed and processing. Poor crop yields in a local area can also affect basis levels for a given year. For example, local areas that incur below average corn yields in the preceding year can potentially see a temporary “positive basis” for corn the following year, especially if the area has strong local corn demand for feed usage and ethanol production.
• Storage and Interest Costs — In a normal year, both CBOT corn and soybean futures prices and cash prices tend to be the lowest level during 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. In recent years (2020-2022), a combination of lower-than-expected crop yields together with strong demand for corn and soybeans, has kept basis levels quite tight. The basis level has even been positive on several occasions in many portions of the Upper Midwest due to reduced crop yields and strong grain demand.

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. In general, 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 basis for cash corn and soybean sales in Southern Minnesota is currently quite tight or positive at many locations compared to the corresponding July CBOT futures prices. Corn basis levels in Southern Minnesota in early May ranged from about $.20 to $.50 per bushel over the CBOT July corn futures price, while the soybean basis ranged from a basis of about $.10 per bushel under the July futures price to $.15 per bushel over the CBOT price at processing plants. The basis level for corn in the Southern Plains States has been highly positive, rising to more than $1.00 per bushel above the July CBOT futures price. These areas were impacted by severe drought and reduced corn yields in 2022 and have high corn usage by the cattle feeding industry in those regions.

The corn and soybean basis levels in Southern Minnesota are much wider for harvest season in 2023. Currently the corn basis for October delivery is $.25 to $.50 under the CBOT December corn futures price, while the soybean basis in the region for October delivery is $.60 to $.80 per bushel under the CBOT November futures price at grain elevators and $.40 to $.50 per bushel under at soybean processing plants. The current basis situation for corn and soybeans is very similar to the basis levels that existed a year ago in early May. However, by the end of October in 2022, the corn basis level in Southern Minnesota had tightened to $.20 to $.30 under the CBOT December futures price and by late November corn basis was positive at many locations in the region. By October of 2022, the soybean basis at processing plants in Southern Minnesota had improved to $.20 to $.30 above the nearby CBOT futures price. The basis improvement in 2022 was due to reduced U.S. corn and soybean yields.

During a six-year period from 2015-2020, corn basis levels in late October typically averaged $.35 to $.45 per bushel under CBOT December futures in Southern Minnesota and soybean basis levels were $.40 to $.90 per bushel under the November futures price at harvest time. During those same years, the local corn basis level for stored grain in the region improved by the following June 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 big question for this year is: “Will 2023 corn and soybean basis levels be a repeat of the positive harvest basis improvement in 2022, or will the basis follow the more typical basis patterns that existed from 2015-2020 ?” The answer will likely depend on the growing season weather patterns and final 2023 U.S. corn and soybean yields.

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 an understanding of basis and various grain marketing strategies. This information is available on the “Ag Decision Maker” website at: https://www.extension.iastate.edu/agdm/

Source: Morning Clips