Grainbasis-TexasAMUniversity.pptVIP

Knowing and Managing a Grain Basis Grain Basis Basis = Cash – Futures Price Characteristics of Basis Less volatile than futures or cash price Basis can be positive or negative Basis has seasonal trends Factors that Determine Basis Transportation costs Local supply and demand conditions Quality variation from underlying futures contract specifications Availability of substitutes Knowledge of Basis Information is Critical Evaluating forward pricing opportunities Evaluating grain storage decisions Trends in Grain Basis Basis tends to be “wider” in the months prior to contract expiration due to uncertainty Basis tends to equal transportation cost as the contract reaches expiration due to the lack of uncertainty Seasonal Basis Trends Basis tends to be the weakest at harvest Ample grain supplies Greater demand for transportation services Basis tends to improve post harvest Improving local supply and demand Less demand on transportation services Figure 1. Texas panhandle cash wheat price and March Kansas City futures price as the delivery month approaches $/bu Tracking Basis Basis Table Nearby Futures Contract Harvest Delivery Date Cash Price Futures Contract Month Futures Contract Price Basis Forward Cash Contract Offer Harvest Contract Futures Price Implied Basis Basis Contract Offer Managing Basis Risk Forward Cash Contract Locks price and basis Basis Contract Locks basis with price to be determined at or prior to delivery Synthetic Basis Contract Combination of a forward cash contract and a long position on the futures Final price is determined when futures contract is offset Transaction costs do exist and margin calls are possible Minimum Price Contract Establishes a floor price and allows the opportunity to benefit from rising prices Diagram of Basis Forward Pricing Decision Forward Contract Hedge Basis Contract Do nothing Acceptable Unacceptable Basis Sheet1 Chart1 Column1 To resize chart data range, drag lower right