Near-north Ontario, French River | Flats, you are correct that the money they make from basis appreciation ( or lose from a collasping basis) is margin. But that appreciation/depreciation in basis is different from what 'basis' is. Basis is basically the premium or discount that an end user is will to pay relative to the CBOT price. It takes into account transportation costs,exchange rates( if the crop is to be imported or exported) , local demand. It's as simple as that. If on a particular day local basis on corn is -.60 and a end user has an urgent need for corn the end user might raise basis but 10cents to-.50 just to attract bushels on that day. If the end user #1 has booked his bushels for the next 5 months he's likely to lower his basis to discourage sellers. Other nearby end users may or may not follow end user #1 based on their own individual needs but generally will cause them to follow to remain competitive. This is why you see some regions with drastically different basis levels. Those with higher basis levels tend to be short of corn and need a higher basis to attract grain from farther away. Those with low basis have an excess of corn, to the point that basis levels are depressed. |
Explanation of Basis
