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Minnesota Soybean Business

Basis: Unlocking the key to crop marketing

May-June 2020

In a world of uncertainly, grain prices are no different. Farmers continually mention basis when talking about the price of grain; though sometimes with basis, there’s often more than meets the eye.

“Relatively speaking, the concept of basis is actually really simple and the math behind it is simple,” says Dr. Frayne Olson, crop economist/marketing specialist with North Dakota State University (NSDSU) Extension. “But to understand what it means as a farmer to make a crop sale or a merchandiser trying to merchandise grain and learn the market signals coming to you through basis is key.”

At the inaugural Northern Commodity Transportation Conference in March, co-sponsored by the Minnesota Soybean Research & Promotion Council (MSR&PC), Dr. Olson provided his insights and expertise on the vast impact basis has across the agricultural industry.

“The futures market and cash market are two separate markets doing two separate things,” Olson says. “We all know that basis is the local cash market price minus the future price, but it means so much more than that.”

The mathematical equation can be easy, but taking it a step further can help with those decisions.

“Basis is your local market telling you, talking to you and trying to regulate the flow of grain. We’re looking at the inflow of grain relative to the outflow of grain and it’s very location specific,” Olson says. “Basis sends a signal saying who needs grain and when they need it.”

These signals create a local cash price, using the futures price as their starting point.

“The futures price is the starting point for negotiations because that is a common, public and a highly visible price that everyone can see,” Olson says. “The reason we use the future price as that starting point is because it has high trading volumes and it’s very liquid. Cash markets use the basis to then signal the local flow of grain, and also signals both the incentive to store as well as the incentive to ship.”

Olson says sometimes farmers misunderstand who is paying the cost for transportation.

“One of the things farmers always complain to me about is that they are paying 100 percent of the transportation bill and I am here to tell you that’s not true,” Olson says. “The buyer and the seller always share in the cost of transportation. The portion paid by the seller, and buyer changes overtime and is influenced by whether it is a demand-driven market or a supply-driven market.”

Grain Marketing Specialist Ed Usset says farmers in North Dakota and Western Minnesota are hit hardest by the basis gap.

In addition to transportation costs, operational effectiveness is also taken into account when determining the basis at a specific location.

“So if I am an elevator and buying soybeans at $1.10 under the futures and am able to sell for May delivery at 80 cents over the futures, that provides me with a gross margin of $1.90,” Olson says. “If we take into account $1.55 railroad tariff rates to the PNW, which depend on location, that only provides the elevators with about 35 cents per-bushel to pay all of their bills and still try to make a profit.”

Closing the gap

During the 2020 Soybean Symposium, University of Minnesota Grain Marketing Specialist Ed Usset spoke about the basis gap in western Minnesota and the Dakotas, which bore the brunt of the damage felt by the U.S.-China trade conflict.

“Ground zero for basis and the trade war is eastern North Dakota and South Dakota. Their basis levels are incredibly wide,” he says. “If we can get trade back on track, the greatest effect will be felt by the Dakotas and western Minnesota.”

Dr. Olson wants farmers to change their thinking of what basis is while viewing grain storage in a new way.

“If you think of your on-farm storage as a profit center, instead of just a cost of doing business, I will guarantee you that you will be a much better grain marketer,” Olson says. “If you think about basis as your local cash market trying to regulate the flow of grain, who needs it worse and when, basis will make a lot of sense. That is why basis differs by location.”

Overall, basis means more than just the difference between two prices.

“Farmers have the opportunity to change their thinking and change their marketing strategy,” Olson says. “In these tough times, understanding the entire crop marketing system can really make a difference in their finances. Education is key.”

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