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5 tips for using basis contracts to market your grain

Agriculture.com Staff 01/07/2010 @ 1:54pm

A late harvest and a lot of grain quality concerns sent basis levels soaring last fall. And, with some specialists expecting wider-than-normal basis levels to continue through much of the winter, basis contract could be one way to meet cash flow needs.

"A basis contract allows a producer to move corn in early to mid-winter and eliminate the cost of storage and basis risk, yet provide cash flow," says Iowa State University (ISU) Extension farm management and grain marketing specialist Steven Johnson. "A basis contract is a marketing tool that most producers have available to them. Consider how to use the tool this winter to reduce risk and hopefully increase revenue from your 2009 corn crop."

Typically, Johnson says, a basis contract is offered in 5,000-bushel increments to match futures contracts, and upon corn delivery, the farmer can collect up to 80% of the cash value of the corn. The remaining value is held by the grain merchandiser "to make potential margin calls should futures prices decline," Johnson adds, with that remainder paid to the farmer once the contract has expired.

Johnson offers these 5 reasons to consider a basis contract:

  1. High moisture levels and lack of air flow in grain bins will not allow that corn to store into the spring months.
  2. The discounts for foreign material (FM) were increased by many processors since early November, anticipating the challenge that lies ahead for maintaining corn quality.
  3. Corn basis will likely widen into late winter as farmers need to generate cash and corn movement increases.
  4. The excessive fall moisture could leave many gravel roads difficult to navigate once the frost leaves.
  5. A basis contract fixes the basis and eliminates storage costs, but allows the producer to benefit from higher futures price.

"Storing the 2009 corn crop on-farm will likely be a bigger challenge than in recent years. Waiting for a spring price rally carries with it the risk of holding corn that could go out of condition," Johnson adds. "Facing the potential for an abnormally wide basis late winter brings an additional risk."

However, any successful use of a basis contract should come with a full plan in mind when it comes to pricing the grain, says Cargill senior grain merchandiser in Eddyville, Iowa, Ray Jenkins. That's especially true when you're dealing with potential grain quality issues, as is the case with the '09 crop.

"Moving the corn to manage quality risk is step 1. Step 2 is having a plan to price the futures side of the contract. Sometimes folks use basis contracts like the 9 month loan program and then postpone/avoid making the decision to exit," Jenkins says. "Having some price objectives in place, both up and downside, is important."

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A late harvest and a lot of grain quality concerns sent basis levels soaring last fall. And, with some specialists expecting wider-than-normal basis levels to continue through much of the winter, basis contract could be one way to meet cash flow needs.

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