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Know your basis, analyst says

01/02/2014 @ 2:28pm

Watch basis levels.  That’s it—watch basis levels.

Every marketing advisor says it, but how often is this advice followed?  The assumption is farmers have hedged inventory (like their local elevator) and will sell the physical bushels when the basis is tight. 

Instead, too many farmers get caught up in using flat price to decide when to pull the trigger.  How to improve?  Consider acting more like an elevator.  This implies having a hedge in place for inventory.  It could be futures and it could be put options.  If the value of the crop is protected from moving substantially lower, then basis levels can be used to determine when to price stored grain.   

Selling when the basis is tight means knowing when the basis is tight.  Some suggest charting local basis numbers, which is a good idea (although realistically hard to do).  It also means knowing what has influenced local basis levels and what changes have occurred over the past few years.   

This also implies getting away from the habit of selling when the checkbook needs filling.  Or hauling it to town after the first of the year to take advantage of “free storage,” also known as deferred pricing (DP).  The market is rewarded with grain without having to bid for it.  Plus, this can lead to a nasty tendency to simply sell at the end of the DP period. 

Coming Soon…

…are the January 10th reports—include final crop production (could be both acreage and yield changes), December 1st grain stocks and new supply/demand tables.  Surprises can come from anywhere.  And it is likely there will be a surprise—with so many numbers, will every pre-report average be correct?  The estimates kick off tomorrow (Friday) during the market. 

The risk of loss in trading commodities can be substantial.  You should therefore carefully consider whether such trading is suitable for you in light of your financial situation. 

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