Understanding Basis Definition Influence factors Basics of basis Patterns and trends

Basis Basis = Cash – Futures Futures reflect global S&D Basis reflects the local S&D Cash = Futures + Basis

Basis basics Specific to time and place Typically use nearby futures Convergence Less variable than cash Relatively predictable

Basis Factors Relative storage capacity Transportation availability and cost Time to expiration Quality issues

Basis

Iowa Grain Price Report http://www.ams.usda.gov/mnreports/nw_gr110.txt NW_GR110 Fri. Jan. 8, 2010 IA Dept. of Ag-USDA Market News Interior Iowa Daily Grain Prices Closing cash grain bids offered to producers as of 2:30 p.m. Dollars per bushel, delivered to Interior Iowa Country Elevators. Iowa Regions #2 Yellow Corn #1 Yellow Soybeans Range Avg Northwest 3.72 – 3.86 3.82 9.55 – 9.64 9.61 North Central 3.82 – 3.91 3.86 9.48 – 9.65 9.59 Northeast 3.82 – 3.99 3.89 9.48 – 9.74 9.60 Southwest 3.64 – 3.85 3.77 9.48 – 9.72 9.63 South Central 3.80 – 3.88 3.84 9.57 – 9.75 9.64 Southeast 3.53 – 3.93 9.54 – 9.72 9.65 Corn basis to STATE AVERAGE PRICE for the CBOT Mar. contract is -.39 Soybean basis to STATE AVERAGE PRICE for the CBOT Mar. contract is -.61

Iowa Grain Price Report http://www.ams.usda.gov/mnreports/nw_gr110.txt NW_GR110 Fri. Jan. 8, 2010 IA Dept. of Ag-USDA Market News Interior Iowa Daily Grain Prices Closing cash grain bids offered to producers as of 2:30 p.m. Dollars per bushel, delivered to Interior Iowa Country Elevators. March Futures Closing Price 4.23 10.22 Iowa Regions #2 Yellow Corn #1 Yellow Soybeans Avg Basis? Northwest 3.82 9.61 North Central 3.86 9.59 Northeast 3.89 9.60 Southwest 3.77 9.63 South Central 3.84 9.64 Southeast 9.65

Specific to time and place http://www.card.iastate.edu/ag_risk_tools/basis_maps/

Price Basis Avg 62.55 0.90 Stdev 11.09 3.61 Min 28.77 -10.57 Max 90.43 13.22

Basis and price forecasting tool Enter specific information Location Date Weight Frame score and grade Sex Number

Specific to time and place http://www.ams.usda.gov/mnreports/lsddgr.pdf http://www.card.iastate.edu/ag_risk_tools/basis_maps/ www.BeefBasis.com http://www.econ.iastate.edu/faculty/lawrence/Acrobat/CurrentLiveCattleBasis.pdf http://www.econ.iastate.edu/faculty/lawrence/Acrobat/CurrentHogBasis.pdf

Grain Basis vs. Livestock Basis Grain is a storable commodity and the same grain can be used to satisfy several futures contract delivery months. So grain futures prices tend to be tied to one another. Livestock is not storable so livestock futures prices for alternative delivery months tend to move independently. Because grain is a storable commodity, the grain basis is tied closely to grain storage costs and interest costs. Livestock are not storable so there are no storage costs built into the basis.

Grain Basis vs. Livestock Basis An inverse basis in grain futures (cash above futures) is unusual and indicates there is something amiss in the grain industry (lack of transportation, for example). An inverse basis in grains will usually last only for a short period. An inverse basis in livestock futures is not unusual for distant delivery contracts and can exist for extended periods of time. Only during the nearby futures contract delivery periods do we expect livestock futures to be above cash price.

Basis Summary Difference between cash and futures Reflects local conditions More predictable than futures Essential to effective hedging