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Leesburg, Ohio | Just to clarify for you, Series 60: The cash price (or posted price or flat price) is really made up of two parts. 1) the futures price, and 2) local basis. The "basis" is the difference between the futures and cash. it accounts for transportation, location, and local demand differences in the market. All grain bids are made off of and move with the Chicago futures bids, but there must be a way for local differences to be incorporated in the cash/final local bid price. Basis allows for that.
So, when using a basis contract, you would deliver grain to the buyer at a set basis price, but your futures price portion of the value would be "open", or not yet defined. You can usually get an advance upon delivery of 60 or 70% of the expected final total price. Then you have a set amount of time to lock in the futures component of the total price. This amount of time depends on what "futures option month" you pick to set the basis against.
Example: Right now, our local cash bid at the ethanol plant 25 miles away is at $3.79, or 20 cents OVER the Dec futures price of $3.59. If I think that is a good basis bid, but I don't like the futures price of $3.59, I can sell them grain on a basis contract at 20 over, deliver it, get paid 60%, or $2.27 per bushel. Then I have until expiration of the Dec futures option to set the futures portion of my price.
The advantage to a basis contract is being able to lock in a basis price you like, and being able to move the grain, and still leaving the futures price open when think the futures price will go up.
If you think futures will go down, a basis contract is not the thing to do. | |
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Basis corn contract
