A36—Lancaster Fanning, Saturday, December S, 1981 Farming’s Futures By David K. Sauder Commodity Advisor Trade Tech, Lancaster How and Why Does the Basis Fluctuate? On any given day, the cash pnce of gram m Chicago is determined by active competition between large numbers of buyers and sellers. Processors, mer chandisers, exporters and retailers are continuously bidding (in cents per bushel under or over the nearby futures pnce) for gram for immediate delivery. If the demand for gram is strong and/or the available supply is small, buyers may become eager bidders and elevators (which make money by storing gram) may become reluctant sellers. The resulting strong cash market (often called the “spot” market) may result m high cash pnces (relative to futures prices) and a narrowing of the basis. Example: On a particular day, the March futures price is (2.10; the Chicago cash price is $2.04; and the Localville cash pnce is $l.BO. The Localville basis Is thus 30 cents under March. The following day witnesses a sudden surge m demand for gram for immediate delivery and the Chicago cash price rises from 6 cents under the March futures to only 4 cents under the March futures. If the March futures price has remained at $2.10, the Chicago The new Weaveriine Series 300 battery-powered Feed Transport-Cart! CHECK THESE ADVANCED-ENGINEERING FEATURES For mechanized dairy feeding! Cut your labor costs with this modern Weaverlme material handling system Built to stand up to years of heavy loads, Weaverlme Senes 300 feed-transport carts are designed with larger discharge augers, more auger clearance, extra-heavy steel bottoms, stronger conveyor shafts and heavy-duty bumper guard shields For a dairy feeding system that demands minimum maintenance and service, specify Weaverlme See these new Series 300 transport carts at your dealer. Or write Weaverlme Corporation. Churchtown, Pennsylvania 17510 Telephone (215)445-6724 cash pnce will be $2.06 and the Localville cash price may increase to $1.82 (a basis of 28 cents). Conversely, if the demand for gram for immediate delivery weakens—-such as might be due to a decline m processing or export requirements of a large supply of cash gram seeking a limited supply of available storage space—cash pnces m Chicago may fall relative to the futures price. The result: A widening of the basis. For example, assume the March futures price remains unchanged at $2.10 but a weak cash market causes the Chicago cash price to decline from 6 cents under to 8 cents under. The Localville basis may thus widen from 30 cents to 32 cents, resulting in a decline in price from $l.BO to $1.78. Local price changes are by no means due to Chicago price changes. A widening of the local basis (and a decline in local prices) may, for example, be triggered by higher transportation costs. Or by a weakening of local and nearby demand for gram. Or by a larger local supply than there is storage available for. Or by a shortage of railroad cars. By the reverse arithmetic, a local supply short-fall, or strong demand by local buyers for gram PROVEN UNLOADING DRIVE LINKAGE Smooth-running roller-chain and belt-drive combination provides 6 conveyor speeds plus individual on-and-off control of upper and lower sets of augers to use or accumulate in inventory, or a favorable change in freight rates could result in a narrowing of the basis and higher local prices relative to the futures price. How important is it to have in formation about local basis?. For reasons that will soon be seen, it is extremely important. Without a knowledge of the usual basis and basis patterns for your particular community, it is im possible to make fully-informed decisions about, for example, whether to accept or reject a given price; whether and when to store your crop; whether, when ami m what delivery month to Hedge, when to close (or “lift") a hedge; or when and how to turn an unusual basis situation into a possible profit opportunity. What records of basis are necessary? At the very least, it is useful to have a weekly record of cash and futures prices—and the basis difference—during thoke months in. which you normally market your crop. Thus, if you j sometimes market corn in December and sometimes not until the following spring or summer, begin keepmg pnce records in December and continue to keep them through July. Nothing elaborate is necessary. A table created by dividing a sheet of lined notebook paper into ver tical columns is satisfactory. Then select a particular day of the week (midweek might be best) and begin keeping a record of the local cash prices, the nearby futures price and the difference (the basis). One such set of records is illustrated here: Is the local basis the same, or similar, from year to year? Similar is a more accurate description than same. This is why records of local basis during past years provide a useful starting point in attempting to estimate what the basis may be at various CONTROLLED UNLOADING Apron conveyor and two pairs of augers can be controlled indi vidually Upper augers prevent bridging. Lower augers and con veyor control discharge flow CONVENIENT POWER PACK Weaverline 4-unit battery pack provides plenty of transport and unloading power. Batteries 'oil out either side of quick ser /icmg To charge, just plug into :hargmg recepticle from any 115 volt AC power source TWO MODELS For maximum capacity, the larger Model 330 measures 81 inches long, 33 inches wide and holds 30 bushels For tight cor ners, the compact Model 323 69 inches long and 33 inches wide Holds 24 bush els Tricycle running gear makes both un its easy to turn—easy to guide tunes during the current market year. Even so, just as the basis can vary from week to week and from month to month—and for much the same reasons—the basis can, and often does, vary from one year to the next. Whenever possible, it can be well worthwhile to attempt to determine the reasons responsible for a change in the basis compared with previous years. Whether they indicate a per manent shift in the relationship between local and futures prices or merely a temporary price aberration that is likely to be soon corrected can be useful to know in planning your marketing strategy. A change from the normal basis level might be permanent or semi permanent if, for example, it was due to a change in local gram demand, such as the opening or closing down of a processing plant in a nearby community. Or the basis and local pnces could be affected adversely if the railroad The Johnson Mountain Boys, who specialize in traditional bluegrass music, will be appearing tonight at the Shindig in the Barn at the Guernsey Pavilion, Lincoln Highway East. They will be appearing with the Lewis Family, of Lincolnton, Ga. in the program beginning at 8 p.m. Tickets include $5.00 for adults, $2.50 for children 6 to 12 and children under 6 free. were to suddenly abandon or restrict service in your area, or if freight rates were to be increased. The basis can also be affected by the size of the crop and the availability of storage space. In years of large crops and storage shortages, the basis is likely to be wider—particularly during the harvest months—than during years of small crops and ample storage. Such variations notwithstanding, the basis is normally much more predictable than the level of gram prices—a fact which, for reasons soon to be shown, enables hedgers to substitute basis risk for price level nsk. Moreover, buyers and sellers who are familiar with the normal basis in them .area are often able to earn profits or reduce risks by reacting properly to short term basis fluctuations. Send your questions on futures trading to Fanning’s Futures, Lancaster Farming Newspaper,, fiox366, Lititz, PA 17543.
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