Factors that Affect Basis
11/6/2009
The following information is bonus material from Top Producer. It corresponds with the article “5 Ways to Use Basis” by Linda H. Smith. You can find the article on page 52 in the November 2009 issue.
Carl German, Extension grain marketing specialist at the University of Delaware, lists the following factors that affect basis.
- Local supply and demand – Basis is typically stronger in a given location when the available supply is scarce relative to demand. It is generally weaker when an area is experiencing ample or abundant production and availability.
- Inverse carrying-charge market – Distant futures contract months are selling at a discount to the near months. The underlying reasons commonly incude strong immediate demand, a short crop, or a large potential harvest following tight current supply. Nearby basis is generally very strong in an inverse market. Cash sales are generally warranted.
- Transportation – The availability and costs of transporting the crop at harvest or during the marketing season can affect the basis. Rail, trucking, and shipping rates can affect the basis, as can road or river closings due to bad weather.
- Storage availability – When the demand for storage space exceeds the available supply, the basis will weaken.
- Stockpiling – Placing grain on the ground (in years of surplus) is expensive and risky, with increased handling costs. This will weaken the basis.
- Storage costs – Generally are affected by the cost of money and the rate of inflation. If either increases, the basis for future sales will weaken.
- Seasonality – A short harvest season coupled with large production can cause the basis to weaken. Conversely, once the harvest "glut" is over, basis often strengthens.
- Location – Moving grain from point A to B costs money and long hauls are expensive. Grain that is grown closest to an end-use buyer typically has a stronger basis offer than that which has to be hauled to the point of use. Terminal elevators at shipping points on the ocean or major rivers also often have a stronger basis than buyers in remote locations.
- Lack of competition – Consolidation has become common to almost every U.S. industry. End users such as exporters, livestock producers, and poultry processors are likely to become fewer and larger in the future. As the grain industry consolidates, the basis is likely to weaken over time, reflecting less competition.
- Uncertainty/psychology – From time to time, grain buyers are faced with conflicting crop reports or other pending news that can cause surges in grain prices (up or down). At those times, buyers are likely to take protection, which tends to change the basis for short periods of time.
