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Heart of Ohio | SOHK "Quote" Would you please take a shot at a full explanation of the basis and futures, calls, puts, contracts, hedge and hedge to arrive ect..?Maybe start a new post and ask for some feedback?It would be greatly appreciated by many if you could make it simple and get the point clearly across instead of mixed up market jargon that only someone that does it every day can keep in his mind how it all works with all the different angles to marketing"
Hard Knock, I'll take a crack at the basis part of your above quote, others are welcome to clean up / clarify noticeable mistakes, hopefully, this will be clearer than a "muddy" river. LOL ( For this example, I used Corn as the grain, and July 17 CBOT contract to illustrate a basis contract. It can be done with most any commodity (depends on the buyer tho) and any contract month that commodity is traded in on the CBOT)
Basis - The difference between the price a local buyer is paying for corn compared to the current posted price at the Chicago Board of Trade (CBOT) on a specific months contract, Using the July 17 CBOT today. It closed at 3.77 1/2 yesterday, lets call it 3.78. If a local buyer was offering a cash price of 3.70 that would be a -.08 (under) basis (CBOT @ 3.78 and basis of -.08 = 3.70) If the local buyer was offering 3.80 instead, that would be a basis of +.02 (over) basis ( CBOT @ 3.78 and basis of +.02 = 3.80) I like to think of the CBOT price as a reflection of how the corn crop supply and use, etc. is doing across the nation and world .... basis reflects the same things closer to my "backyard"
Most buyers today can offer a "Basis only" contract which means, buyer and seller make a contract of certain amount of bushels at a specific basis price based on a specific contract month traded on the CBOT. This locks the basis ONLY, final net settled price will still move up or down penny for penny with the CBOT until the seller prices (contracts) the CBOT price.
Real life example. Yesterday morning a local buyer had a basis of +.10 over the July 17 CBOT contract, (history tells me they need some corn, common during planting season) a current cash price sale would net a price of 3.88. (CBOT @ 3.78 plus a basis @ +.10 = 3.88) A basis only contract with them for old crop bushels on your farm would mean you have now set (locked) the +.10 basis and can now "final" price it any time the CBOT is trading between today and the last day of June for the quoted July 17 CBOT price, plus .10 cents basis contracted yesterday ("here" the CBOT has to be open to final price a basis contract, I'm pretty sure that's the case everywhere).
Why would I do this ??? IF I think the price of corn has some room to go up from here, I also think IF that happens ..... my local buyer will begin to get most of the bushels he needs from people selling a rising market (Maizeing referred to them as "flat price motivated sellers") he no longer needs to bump up basis to get needed bushels because the rising futures price is doing that for him, his basis tends to "drop", "widen", "lower" from there because he may be getting more bushels than he can even use at that time. (Happened too, local buyer went from +.10 to +.06 last night, lowered basis .04 cents)
What do I gain by doing this ?? Well ...... so far haven't gained a thing price wise, the basis did go down 4 cents yesterday so .... I didn't lose that but, as I write this the July 17 CBOT price is down 4 cents, so lost that. Would have been better off just pricing it outright at 3.88 right? Maybe ..... this is where choices get personnel.
My view / philosophy regarding my on farm storage other than harvest convenience, is to use it as a "basis chaser", sell the best dang basis I can find / get. I have numerous ways and opportunities to final price my crop. (Futures, options, etc.)
What's the positives about a basis contract then ?? Several things.
- Lock in a higher basis when the opportunity is there, that's USUALLY, but......... NOT ALWAYS when CBOT prices are lower in a plentiful / burdensome supply situation (ie. basis gets supply to move when CBOT prices wont.)
- Lets you move bushels off the farm NOW, no more concerns or maintenance for grain quality.
- Gives you some more time for prices to go up before you final price it. No cap on how high the price can go should the Market make a run higher (Negative part is more time to go down too !!! No floor on how low it can go EITHER !!!)
- If you choose, it's common for the buyer to pay seller 80% of the value of bushels delivered as though they were final priced at that days market (ie. July 17 CBOT quote is 3.70 that day plus the +.10 basis contract = 3.80 * .80% = 3.04 advance. HOWEVER, UNDERSTAND !!! If ..... you have not final priced the July 17 CBOT part of that contract AND CBOT price falls below the 3.04 advanced to you. ..... you WILL be paying back some of that advanced money !! I.E. if July 17 CBOT falls to 2.94 you will pay the buyer back .10 cents per bushel and do so penny for penny lower till final priced, should the market go back up you can then get that money back. (There MAY BE some fees associated with that, IDK, never had it happen, look for that on the buyers contract)
- It can be final priced anytime the CBOT is open for trading, If final price is higher than the 3.04 in above example, you'll have some funds generated with a phone call in what ever amount of time it takes for the buyer to get you a check.
- It can be "rolled" forward if you want more time to final price it, I.E. If the contract is ("based" (Daily price changes)) on CBOT July 17 Futures it has to be final priced OR "rolled" by the end of June. "Rolling" it forward is moving it from being based on CBOT July 17 futures to being based on CBOT Sept 17 futures, you would then have till the end of August to final price the CBOT. THERE ARE FEES ASSOCIATED WITH DOING THAT !!! Usually a few cents. The SPREAD (difference in the price between CBOT July and September) also somewhat comes into play but is "adjusted" for. I have never done one, would be best to check with your buyer regarding that OR one of the veteran grain buyers, experienced sellers on here to explain it.
- Some if not most buyers allow final pricing in increments if you want (i.e. a 10,000 bu. basis contract could actually be final CBOT priced in 1000 bu. sales or a combination there of) Check with your buyer and on his contract.
- Some NEGATIVES about a basis contract ????
- No floor (bottom) price is in place until you set (sell) the CBOT, if the CBOT is going lower ? So is your potential selling price ...... penny for penny
- Requires at least two transactions (two decisions) to complete one contract. 1) contracting the basis price, 2) "setting", "pricing", "selling" the CBOT price.
- You could be wrong about local buyers situation or circumstance that takes his basis even higher than you contracted at and CBOT futures stay flat or go lower. (I.E. July goes to 4.00 and local basis goes to +.20 (over) cash price is then 4.20 and your still at a basis of +.10 and selling at 4.10
- Be sure you understand fully your buyers contract and KNOW what you can and can not do in regards to CBOT pricing, delivery, pay back of any portion of the 80% advance should it occur, any fees associated with such actions etc. etc.
- It's not as simple as a cash contract, not as complicated as I may have made it sound either. LOL
I've run out of time for this today but, will quickly say in regards to the Hedge to Arrive contract mentioned above ? It behaves almost identical to a basis only contract..... it's just the opposite though, seller sets (contracts) the CBOT Futures price and the buyers basis is left open to move up or down till seller sets it or delivers the commodity to buyer. I use those for almost all new crop sales made during the year.
I truly Hope this helps Hard Knock, and any other interested individuals able to glean something useful from this effort.
All should feel free to add your thoughts and useful suggestions / experiences / corrections
Stay calm, MARKET ON !
Edited by Frisky3208 5/2/2017 15:35
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School of Hard Knock, from the Basis sucks thread
