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ECON 337: Agricultural Marketing. Lee Schulz Assistant Professor [email protected] 515-294-3356. Chad Hart Associate Professor [email protected] 515-294-9911. Basis. Basis = Cash – Futures Futures reflect global supply and demand Basis reflects local supply and demand - PowerPoint PPT Presentation
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ECON 337:Agricultural Marketing
Chad HartAssociate [email protected]
Lee SchulzAssistant [email protected]
BasisBasis = Cash – Futures
Futures reflect global supply and demandBasis reflects local supply and demand
Cash = Futures + Basis
Basis BasicsSpecific to time and placeTypically use nearby futuresConvergenceLess variable than cash pricesRelatively predictable
Basis Factors
Relative storage capacityTransportation availability and costTime to expirationQuality issues
Basis Terms
Interior Iowa Daily Grain Priceshttp://www.ams.usda.gov/mnreports/nw_gr110.txtClosing cash grain bids offered to producers as of 3:00 p.m.Dollars per bushel, delivered to Interior Iowa Country Elevators.
US 2 Yellow Corn Prices were generally steady to 1 cent higher for a state average of 4.23.
US 1 Yellow Soybean Prices were generally 8 to 10 cents higher for a state average of 12.43.
Iowa Regions #2 Yellow Corn #1 Yellow Soybeans Range Avg Range Avg Northwest 4.05 – 4.26 4.20 12.35 – 12.47 12.42 North Central 4.19 – 4.41 4.27 12.35 – 12.53 12.42 Northeast 4.18 – 4.31 4.24 12.24 – 12.53 12.36 Southwest 3.94 – 4.29 4.13 12.38 – 12.60 12.50 South Central 4.19 – 4.34 4.24 12.39 – 12.58 12.44 Southeast 4.15 – 4.38 4.26 12.36 – 12.51 12.44
Corn basis to STATE AVERAGE PRICE for the CBOT MAR contract is -.11Soybean basis to STATE AVERAGE PRICE for the CBOT MAR contract is -.40
Specific to Time and Place
Average Iowa Corn Basis, 2007-11
Source: http://www.extension.iastate.edu/agdm/crops/pdf/a2-41.pdf
Iowa Corn Basis, May Futures, 2007-11
Source: http://www.extension.iastate.edu/agdm/crops/pdf/a2-41.pdf
Iowa Corn Basis, May Futures, 2007-11
Source: http://www.extension.iastate.edu/agdm/crops/pdf/a2-41.pdf
Basis InformationISU Extension and Outreach, Ag Decision Maker Corn http://www.extension.iastate.edu/agdm/crops/html/a2-41.html Soy http://www.extension.iastate.edu/agdm/crops/html/a2-42.html Cattle http://www.extension.iastate.edu/agdm/livestock/html/b2-42.html Hogs http://www.extension.iastate.edu/agdm/livestock/html/b2-41.html
USDA-Ag. Marketing Service http://www.ams.usda.gov/mnreports/lsddgr.pdf http://www.ams.usda.gov/mnreports/nw_gr110.txt
Local elevators, ethanol plants, processing plants, etc.
Basis and price forecasting toolEnter specific information
LocationDateWeightFrame score and gradeSexNumber
Sex = SteerFrame = Lg & Med/LgGrade = 1Head = 100
Sex = SteerFrame = Lg & Med/LgGrade = 1Head = 100
Period of increasing supplies, prices are expected to decline. Cash market reflects today's supply conditions and price. Futures market reflects upcoming conditions of expected larger
supplies and lower prices. Basis may be very narrow or cash price may be above futures.
i.e., Hogs: mid-August to mid-September.
Period of decreasing supplies, prices are expected to increase. i.e., Hogs: late-Dec and early-Jan against the Feb futures.
Seasonal price period of relatively large supplies and low cash prices, but the Feb futures contract reflects a delivery period of expected smaller supplies and higher prices.
Low cash prices and high futures translate into a wide basis.
Seasonal Price Patterns & Basis
Hedgers can deliver on a futures contract.
If enough producers deliver on futures contracts, cash prices will tend to move up relative to futures.
The threat of delivery tends to limit how wide the
basis will be during the delivery period.
The variation in basis during delivery periods tends to be less than during periods with no delivery option.
Threat of Delivery & Basis
Grain Basis vs. Livestock Basis Grain is a storable commodity and the same
grain can be used to satisfy several futures contract delivery months. So grain futures prices tend to be tied to one another.
Livestock is not storable so livestock futures prices for alternative delivery months tend to move independently.
Because grain is a storable commodity, the grain basis is tied closely to grain storage costs and interest costs. Livestock are not storable so there are no storage costs built into the basis.
Grain Basis vs. Livestock Basis An inverse basis in grain futures (cash above
futures) is unusual and indicates there is something amiss in the grain industry (lack of transportation, for example). An inverse basis in grains will usually last only for a short period.
An inverse basis in livestock futures is not unusual for distant delivery contracts and can exist for extended periods of time. Only during the nearby futures contract delivery periods do we expect livestock futures to be above cash price.
Convergence
11.50
11.70
11.90
12.10
12.30
12.50
12.70
12.90
13.10
13.30
13.50
1/1
2/1
3/1
4/1
5/1
6/1
7/1
8/1
9/1
10/1
11/1
$ p
er
bush
el
Futures Cash
Convergence IssuesTypically, as futures contracts reach maturity, futures price and cash prices at delivery points tend to converge to the same level.
For several grain and oilseed futures contracts over the last few years, this has not occurred.
“Poor Convergence Performance of CBOT Corn, Soybean and Wheat Futures Contracts: Causes and Solutions”Scott Irwin, Philip Garcia, Darrel Good, and Eugene KundaUniversity of Illinois, March 2009
Why Is Convergence An Issue?
1.Non-convergence indicates the market is out-of-balance.“When a contract is out of balance the disadvantaged side
ceases trading and the contract disappears.” (Hieronymus, 1977)
2.Non-convergence adds to the uncertainty in basis and limits hedging effectiveness.
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Factors The relationship between the spread between
futures contracts and the cost of carry (think storage costs) In the settlement process for corn and soybean futures,
the delivery instrument is a shipping certificate. If it is advantageous to the holder of a shipping
certificate, they can delay delivery and effectively store the grain, paying CBOT set storage costs.
Structural issues related to the delivery process Does the general trade flow of the commodity line up
with the possible delivery points under the futures contract?
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Delivery Points
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Corn Soybeans Wheat
How much of the commodity is moving through the delivery point areas?
Class web site:http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2014/
Guest speaker for lab, Heady 68
