LKM - 6/26/2012 09:33

I think one thing to remeber is that basis is the product of competition and scarcety (or the lack of those 2). The other thing to remember is that the function of the grain and wharehouse industry is to accomodate the inconsistencies between producer sales and end user needs. Basis is a constantly evolving/working market... As opposed to just picking a number.

Some examples:
A soybean crush plant in china knows what the market for soybean meal and oil is in theyre local market, based on current cbot price they know by purchasing soybeans at +2.00sx12 they can crush a positive margin. So they bid +2.00sx to an american exporter. The american exporter knows that they can secure vessel freight at 1.00/bu for october(high due to harvest demand) and also they know that it costs them 5c/bu to offload barges and load that on a vessel. That means a barge delivered to their export facility in new orleans is worth +95sx12... So the exporter bids the river loading grain elevator +94sx12, because the exporter would like to make 1c margin maybe.... The river loading grain elevator is monitoring the market for barge freight and knows that it will cost 64cpb in transportation costs to the exporters facility, and it costs 5cpb to cover the cost of operating the facility so trucks of soybeans delivered to that elevator are worth +25sx12... The elevator bids the farmer +22sx12 because they would like to make a 3cpb margin.

Thats an snapshot of how a basis value is calculated... But, absolutely none of those values are constant. If pork prices or veg oil price in china goes up, then the chinese crush plant trys to buy more soybeans, this pushes the value of soybeans higher. This increased demand creates more vessel freight demand which changes that value. That increased demand uses export capacity, which is not infinate, so export margins... Exporters then increase the bid for barges delivered new orleans... And because the winter was warm coal demand was really weak, so barge freight transportation is in less demand which lowers its price.... And on and on and on.

The ethanol plant is monitoring ethanol values, operating costs, other competitors, ddg values, etc etc etc