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Understanding basis

R

rrlund

Well-known Member
Any of you who are interested in understanding basis a little better when it comes to crop pricing,and why the final destination for that grain matters,they covered it to some extent on Ag Day this morning. The same thing applies to milk and livestock too,but they talk about it in terms of soybeans on today's show. Just click the first player in the link to view todays episode.
Ag Day
 
So in other words, the biggest crop ever after several big crops has caused prices to fall, with some of the western producers getting hit harder due to no China buying. But even so the majority still think the current trade negotiations are going well and are the right thing. Except for one or two farmers who don't even grow beans.
 
Well lets see who gets hurt by falling grain prices? Corn and soybean farmers and a few grain traders.Who benefits? Anyone feeding grain to livestock,anyone buying grain fed meat,anyone that buys dog food or anything
else that made with grain,millions of people.Frankly I haven't really forgotten how the grain growers were gloating a few years ago over how glad they were getting rich with the
grain prices sky high and tough S++t to the grain users.Oh, and how they were all saying grain prices would never go down again.Shoe is on the other foot now.
 
Covered the grain supply side of economics but the demand side is the other half of economics. If farmers lose 30% of export market demand, that has a down push on market price. Which is part of the reason for mid 8.00 beans today and lower prices west of Ms river. It affects more than one or two farmers, more like quarter million growers.
 
I think I have complained about this before but after years of trying to understand why basis makes any difference at all to me, I've given up. I ask the grain buyer at the terminals what I will get when they hand me the cheque for my grain. That is the bottom line for me. How much or how little the basis was makes no difference that I can see.
 
Even according to the link those farmers hurt by it are in favor of it because of all the good it's doing. On this site there is only one who keeps beating this to death, and he doesn't grow soybeans.
 
The world supply of soybeans is limited. China might be buying some from other sources in the short term, but those suppliers can't provide all China needs. Prices will bounce back soon.
 
There probably aren't two dozen of us on here who know what basis is,but things like it come up in discussions from time to time. When I watched the show this morning,I thought they made pretty good mention of it and it might help a bunch of non farmers out. You're right,there's never any mention of basis at the elevator for the most part,just the posted grower paying price,but if somebody looks at the price on the Chicago Board of Trade and thinks that's what farmers get a check for,they're wrong. Just trying to help them understand the difference between CBOT price and grower paying price.

When I was shipping milk and the price was based on pounds shipped and butterfat test instead of components and all the quality premiums,a friend and I were talking price one night. His butterfat was the same as mine but his price was ten cents lower. It finally dawned on us that we were shipping to two different MMPA plants. I was shipping to a "zero zone" plant,meaning that there was no basis,he was shipping to a "minus ten" plant,meaning that there was a ten cent basis in his milk. Both plants were owned jointly by the same co-op and cheese manufacturer,but because they figured milk was coming from farther away to one,there was a ten cent basis to cover transportation.
 
I guess I lean the other direction, my grain gets bought by my local couple coops, and really only the local cash price they set - which reflects the basis - matters to me.

The CBOT bid is imaginary number to me, I guess it makes it easier to follow the up and down trends of grain prices over time, but I have never ever been paid CBOT bid on any grain I ever sold. It is -always- CBOT price minus the local basis that sets my grain prices.

Basis makes much more difference to me. Basis once or twice in my life was higher than CBOT, and can easily range a dollar or more less than CBOT. Living in a grain surplus region, if CBOT goes up 30 cents, often basis goes down 20 cents at the same time so my big windfall of grain income is a whopping dime, not 30 cents!

Paul
 
Basis is almost always listed around here. In a price chart for today, like this. (If uploading pics works today....)

The ?futures? price is CBOT price everyone across the nation hears.

The cash price is what I actually get.

The basis column is what I lose because of my location, we grow way more corn and beans than what we consume here locally. The basis price reflects shipping the extra grain out to people who want to buy some and are short.

Texas for example uses a lot of grain, but have a hard time growing a lot. So their basis might often be a postive number.

Basis is a reflection of what I actually get paid for my crop.

Paul
a282062.jpg
 
The same thing happens with Holstein steers here in Michigan. There are a lot of them,but few slaughter facilities within a reasonable distance slaughters them. They're full of colored cattle and just won't buy Holsteins. They don't need them. There's always been a difference in the price between Holsteins and colored cattle,but since those nearby plants stopped taking them,the spread has gotten enormous. Order buyers can't pay a good price if transportation is going to eat up all of their profit.
 
Thank you for posting. Basis is a good indicator of demand- it will fluctuate seasonally to reflect the demand in the marketplace. It is generally wide during harvest, and usually narrows going into spring as processors and end users need to replenish their feedstocks.

Basis is also a reflection of distance to markets and transportation costs.

Soybean basis has been interesting this summer, as most of the beans in my part of the world go to the pacific northwest ports. Soybean basis has widened 30-60 cents or more due to the lack of bids in the PNW. So, basis indicates to us that the demand for our beans is quite low out there.

In the cattle markets in my area of western MN/eastern SD, basis tends to be a positive number, meaning feeder cattle and fat cattle tend to sell higher in the cash markets than what they are trading at in Chicago on the futures market. Again, it is a reflection of demand.

Lon
 
I don't know what basis is on milk here in Michigan right now. The new Foremost plant,nine miles west of me,as far as I know is still scheduled to come on line this month. This spring some of the guys were saying that they were getting hit with a $2 basis because their milk was having to go all the way to Wisconsin. That'd be one heck of a hit.
 
On the news show "this week in agri-business" a grain market analyst was interviewed. He said carryout for beans was 400,000,000 bushels in 2017. He said this year 2018 we will likely have 1 billion bushels carryout for beans. If he is right that is 2.5 times the beans we had in 2017 with no place to go with them. He said it could be years before China wants US beans again. Sobering forecasts which are reflected in down market price.
 
Did that guy mention there is countries buying beans from the US that don't normally buy.

Argentina bought last week.

I bet those beans never see the shores of Argentina.They will go direct to China as other purchases have done.

China needs our beans worst than we need their gadgets
 
Simple definition Basis- Basis is the amount of money between the Chicago Board price and the actual price you are paid.

This number is not always a negative number if the buyer wants it worse than what the Chicago price is. I have sold corn over the Chicago price many times.
 
Basis last year was 85 cents on beans. It?s already headed up here and the email I got today predicted close to a $2 basis. That?s beans well below $7. I am getting all of the bins ready to store maximum on farm storage. I couldn?t tell you the last time every bin here was full after harvest. I?ve just got to do it to make it pencil out. Even then the pencil gets pretty dull. I pity the guys who have lots of equipment loans. This isn?t the year to be extravagant.
 
Simple definition Basis- Basis is the amount of money between the Chicago Board price and the actual price you are paid.

Correct,just as simple as that,but like I said,probably not more than two dozen of us here who knew that. I've learned over the years on here that when you start talking ag terminology,the majority of people don't know what you're talking about. Not a bad idea to let them know,don't you think?
 
There is more to basis than just the difference from board price to cash. You can contract grain on a set basis. With the board moving up or steady with basis deteriorating causing a gain for the producer. Not necessarily a price increase but a reduction in loss. If you contract bean basis at 60 cents and the basis opens to 80 cents, with the board at the same level you gained 20 cents. Looking at next years basis on beans at ADM Grand Ledge I am thinking about contracting some for next year hoping for some board increase. With the typical fall basis of around 70-90 cents I would be at 65 cents so a 5-25 cent improvement. Looking at it like that. Now if the board gained 20 cents. I could actually see an improvement if 20-45 cents now it could make for the difference of survival or bankruptcy. Not saying this will all happen as I present however it could all prove to be even more either direction.
 
Basis has been around a while. I remember it being a topic of discussion back in the 70's.

As far as the price of beans because of the trade war? A grand total of just over 2% of the US population farms or works in a AG related industry. That's it. Just over 2%. Think about numbers guys. When they tell you that plus or minus 32,000 Americans die of gun shot wounds on average. That's about .009% of the population. Now minus the suicides, ligit police, self defense and accidental shootings you have about 9000. Now were are down to about .002% of the population. So when you say a quarter of a million that sounds like a lot. But it's .07%. Now not trying to marginalize farmers in general but the greater good thing kicks in here. Do you mess over 100% of the population (because bad trade deals affect us all) or .07% for a short time period?

So as they used to say in the military, suck it up and drive on buttercup!

Rick
 
I don't live there,so I'm just taking what they said on Ag Day the last few weeks as gospel,but they were talking $6.30 beans in some places due to basis.
 
Yes Gary,but to keep this totally relevant to this topic,would those beans leave through the PNW and improve basis in the northern plains,or would they go through the gulf and the Panama Canal? I'm just talking basis,not sales or demand.
 
Argentina is buying more beans than last year, way more. They have run completely out of soybean meal and they bought several ship loads to keep their crush plants operating and fill demand for meal and oil that they need in their country. They could re-sell some to China who knows how that works. I would guess shipments to Argentina go through southern US ports but not certain. Beans around here go down the Ms to New Orleans if going overseas.
 
Or just tell the Chinamen we won?t sell you beans
period and see how long until they change their
minds
 
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