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eastern Nebraska | I'd have to have more information to give you a realistic scenario... but for argument's sake... maybe take the top 200 corn buyers by volume in the US by location (Cargill, for example, would be in there multiple times, but different locations), weight them by volume in the index, and use the average of their posted bid over the two weeks prior to contract expiration. I honestly don't know if 200 would be enough or too many -- it would need to be a statistically significant coverage of production and consumption. The averaging period would need to be long enough that the oligopoly (ADM, Bunge, Cargill, Anderson's, and Dreyfus) couldn't artificially maneuver basis without seriously jeopardizing their needed inflow of cash grain -- I would think two weeks would do it, but again not sure. Since the contract is cash settled, arbitrage would bring the index and futures contract into alignment. An indexed contract wouldn't eliminate the basis market at all, it would just make for more confidence and understanding in how convergence is determined.
The big issue I saw last year was, say a cattle feeder or ethanol producer wanted to lock down his corn needs post harvest. The local elevator wouldn't contract futures or basis since they didn't have ownership. The local producer didn't want to sell direct because they were bullish. The end-user was anxious to lock down some of the price break on the board... what are his choices? The cash market was going higher, while the futures were breaking. He didn't have a hedge. If he was able to buy the board with the confidence that board and cash would eventually come together, he has a usable contract for risk management. When the futures converge to cash, he has the extra dough it takes to go buy grain in the cash market. Basis firmed all summer last year until the "cliff" -- but until then, that user was chasing a completely different market than what the futures were converging to. During deliveries last year, the futures would post sharp rallies about the 3rd day into deliveries, and about 3 days before expiration ADM would bury their river basis, only to shoot it up again the following week. So it is pretty obvious the risk of delivery mechanism is broken. The vast-majority of end-users can't take delivery of a barge on the Illinois River, offload, and transport the grain to a place where it is needed. It's nearly impossible to do even if you're located there. And try to actually deliver on a contract as an individual producer? Good luck. The hoops you have to jump through to certify for export is impossible for most producers. So again, there was No hedge. Hopefully they were hedged up earlier in 2012 and lifted them... These guys were doing business by the seat of their pants, which is NOT where a processor wants to be, or doing worse by attempting to hedge and getting killed. I pick on ADM a bit because they're kind of forced to do what has to be done on the river to keep up appearance, but you know dang well their domestic buyers were pulling their hair out too. The expiration of the contract should converge to a price reasonably reflective of where the cash is trading -- in a USABLE manner by the majority of actual producers and end-users.
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John Burn's question the other day.
