Basis and Hedging.pptVIP

Understanding Basis Definition Influence factors Basics of basis Patterns and trends Basis Basis = Cash – Futures Futures reflect global SD Basis reflects the local SD Cash = Futures + Basis Basis basics Specific to time and place Typically use nearby futures Convergence Less variable than cash Relatively predictable Basis Factors Relative storage capacity Transportation availability and cost Time to expiration Quality issues Basis Specific to time and place Iowa Grain Price Report/mnreports/nw_gr110.txt Iowa Grain Price Report/mnreports/nw_gr110.txt Specific to time and place /mnreports/lsddgr.pdf /ag_risk_tools/basis_maps/ www.BeefB /faculty/lawrence/Acrobat/CurrentLiveCattleBasis.pdf /faculty/lawrence/Acrobat/CurrentHogBasis.pdf Grain Basis vs. Livestock Basis Grain is a storable commodity and the same grain can be used to satisfy several futures contract delivery months. So grain futures prices tend to be tied to one another. Livestock is not storable so livestock futures prices for alternative delivery months tend to move independently. Because grain is a storable commodity, the grain basis is tied closely to grain storage costs and interest costs. Livestock are not storable so there are no storage costs built into the basis. Grain Basis vs. Livestock Basis An inverse basis in grain futures (cash above futures) is unusual and indicates there is something amiss in the grain industry (lack of transportation, for example). An inverse basis in grains will usually last only for a short period. An inverse basis in livestock futures is not unusual for distant delivery contracts and can exist for extended periods of time. Only during the nearby futures contract delivery periods do we expect livestock futures to be above cash price. Basis Summary Difference between cash and futures Reflects local conditions More predictable than futures Essential to effective hedging Introduction to Hedging Definition Types Mechanics Hedging definition Hedging is buying or s