Base Grain Sales on Basis Signals

08:00AM Sep 18, 2020
Corn Grain 6
Know which marketing tool to pull from the toolbox.
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Know which marketing tool to pull from the toolbox

Without accurate basis analysis, you can’t confidently select the right marketing strategy. When basis is stronger than normal, your cash-marketing strategy should be to lock in basis but not necessarily price. On the flip side, when basis is weaker than normal, your strategy should lock in price but not basis.

Over time, basis tends to move back to a normal level. By following this basic marketing strategy, you will improve your grain marketing by adding the change in basis to the final selling price.

Use basis analysis to determine if basis should be captured or left open. Then, use your price outlook to determine if price should be locked in or left open.  

WEAK BASIS

Do Nothing 
When to Use:

  • Basis is weaker than normal, and you have a bullish price outlook.
  • You have reasonably priced storage available.
  • You expect basis to strengthen to at least normal levels to cover expected storage costs.

Hedge-to-Arrive Contract 
When to Use:

  • Basis is weaker than normal, and your price outlook is bearish.
  • Hedgers: Basis is weaker than normal, and the price is excellent.
  • Cash-only: Basis is weaker than normal, price is excellent or price is below excellent levels, but you have a negative price outlook.

Deferred-Price Contract 
When to Use:

  • Basis is weaker than normal, and you have a bullish price outlook.
  • Storage is unavailable or too expensive relative to expected improvement in basis.
  • The elevator or co-op is bonded and rock solid. Using a deferred-price contract makes you an unsecured creditor to the grain buyer.

Purchase a Put Option
When to Use:

  • Basis is weaker than normal, and you have an uncertain price outlook.
  • The difference between the strike price and the premium paid results is an acceptable price.

 

STRONG BASIS

Do Nothing 
When to Use:

  • Basis is stronger than normal.
  • You see no immediate threat to basis strength, and your price outlook is bullish.
  • You have reasonably priced storage available.
  • You expect price strength alone to cover storage costs. 
  • This strategy is most common ahead of harvest.

Forward-Contract Cash Sale 
When to Use:

  • Basis is stronger than normal, and you have a bearish price outlook.

Spot Market Cash Sale 
When to Use:

  • Basis is stronger than normal, and you have a bearish price outlook.
  • It works best when underlying futures are at an excellent level.

Basis-Contract Cash Sale
When to Use:

  • Basis is stronger than normal, and you have a bullish price outlook.

Sell Cash and Buy Futures (Buyback)
When to Use:

  • Basis is stronger than normal, and you are convinced the price outlook for futures is bullish.