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Watching cash basis habits

04/20/2012 @ 2:05pm

One of the keys to making good marketing moves is to follow clues given by cash basis. Having a good basis normally is a sign of good demand. It also should be a sign of good cash price outlook. Sometimes basis will change for reasons that only become apparent after the fact.

An instance of that is illustrated by the bids for new crop November soybeans on January 3 compared to April 13. Here, in eastern Nebraska, the basis for new crop soybeans on January 3 was -$1.10. The November futures price that day was $12.19. By April 13, the basis had improved to -$.75. That much basis improvement in that short of a time period is almost unheard of. During that same time, the November futures price rallied $1.18. The basis improvement was a clear indicator of demand improving at the same time. The basis improvement has slowed since the end of February.  That may be a sign that demand is leveling off. As of today, the basis is still holding at -$.75. If it starts slipping it will be an indicator that the time has come to pull the trigger on new crop forward contracts.  

The corn market has also had an interesting basis pattern. The basis improved a lot since the first of the year. However, the futures bids have not shown the dramatic increase in price that soybean futures have. I have been marveling at the basis of -$.06 reflected in the cash bid. The biggest jump was between April 12 and April 18. The local buyer here in Cass County, Nebraska, switched from May futures to July futures on April 13. That accounts for nine cents of the basis improvement during that time.

The basis moves in the corn market continue to reflect good demand for old crop corn. The bids drop off by six cents after the end of May. That factor should be encouragement for farmers holding old crop corn to get sales made this month or early next month. Anticipation of an increase in corn acres is the main factor in futures price movements. However, basis moves indicate what the true demand is for the cash grain.

Whether the shift in the price structure between corn and soybeans becomes a fundamental factor in supplies remains to be seen. My experience tells me that most planting decisions are made well ahead of April 1 when the biggest price moves came about. Whether there will be an acreage shift big enough to be a price factor is questionable.

One thing this week’s price action has taught us is that with very tight supplies, any small news item can bring a very large reaction in the markets. With April, May and June being the months with the highest odds for price peaks, big rallies are opportunities to sell. Don’t pass up a good price when it is offered!

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What's the meaning of basis? 04/22/2012 @ 11:08pm Hello, I'm from Argentina. I don't really understand what you mean with cash basis and do you calculate it. I would really appreciate if you could explain it. Thank you very much.

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