farming’s futures
By David K. Sauder
Commodity Advisor
Trade Tech, Lancaster
Can the basis be predicted
exactly?^
From the earlier discussion of
the many economic factors that
can and do influence the basis from
one month to the next or even from
one year to the next, the answer is
obviously that what the basis will
be in a given month in the future
cannot be predicted exactly.
For example, .if you hedge by
selling at a futures price of $2.25 in
anticipation that the basis at the
time of delivery will be 25 cents,
the basis may or may not turn out
to be exactly 25 cents. It may be 20
cents (thereby netting you a higher
price than you anticipated) or it
may be 30 cents (thereby netting
you a lower price than you an
ticipated).
The uncertainty as to what the
basis will be at a given time in the
future results in what is known as
basis risk. It is the reason that the
results of hedging are not always
penny perfect.
Even so, basis can generally be
predicted with far 'greater ac
curacy than the level of prices.
Hedgers are thus willing to accept
the relatively small risk of an
unfavorable basis change in
preference to the usually much,
greater risk of an unfavorable
price level change. By hedging,
they in effect substitute basis risk
for price level risk.
How can a hedger use his basis
knowledge profitably?
Successful hedgers who seek to
Bradford Co.
raised to date. He stated that he
hoped the goal of $35,000 could be
realized soon so that the building
could be completed by next July.
Following a short business
meeting, two new directors were
elected to the executive committee
tor a six year term; J£Uen Foust ot
Granville, and Roy Beardslee of
Wetona.
The Glencoe.
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Photos courtesy of Pontiac Soil Conservation Servr
with a
Glencoe Soil Saver. It chops
and incorporates crop residue
and leaves the field ridged
cioi
erosion protection. You save
too! That's important in a wet tali or any- */
time. No more disking, shredding, field layout, back
HAMILTON EQUIPMENT, INC.
Glencoe ® Portable Elevator Division Dynamics Corporation of America, Bloomington, !L 61701
lock in a' storage payment con
tinuously attempt to initiate their
hedges at a time when the basis is
as wide as possible and lift their
hedges when the basis is as narrow
as possible. While there is cer
tainly no assurance that they \fill
be able to carry out such a
strategy, they are ever-watchful
for opportunities.
Example: Assume you hedged
com when the local price was $2.00
and the futures price was $2.50 a
basis of SQ cents. You anticipate
that when you are ready to sell
your com locally and lift the hedge
the - basis will be about 25 cents
giving you a net price of $2.25.
As the delivery .month ap
proaches you watch the basis
carefully and, on a particular day,
you notice that it has narrowed
sharply to 10 cents. By seizing on
the opportunity to sell your com
and lift the hedge on a narrower
than expected basis, you net $2.40
which is 15 cents a bushel more
than you anticipated.
Is it possible to forecast, in
advance of harvest, what the basis
is likely to be at harvest?
To the extent that the basis is at
least partially a reflection of the
demand for storage space, a large
crop is frequently an indication to
expect a wide basis at harvest
(when the need for storage space
may exceed the supply, causing
cash prices to be discounted more
than usual in relation to futures
prices).
(Continued irom Page Aid)
Cooperative Extension workers
introduced were Orville Yoder,
Bradford County Agent, A 1 Homan
and Jake Gutfey, county agents,
Lovetta Comstock, 4-H agent,
Cathy Bakalar, nutrition home
economist, Jean Smith and Carol
Chattee', secretaries, and mem
bers ot the extension executive
committee.
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youa
-choice
s of pre'
See Your Local Dealer or Contact:
gives
V-‘
Ephrata, PA
Phone: 717-733-7951
As the marketing year
progresses and the supply of grain
still seeking storage diminishes,
the basis generally returns to more
normal levels. As a result,, large
crops are often associated with
iarger-than-usual opportunities for
storage profits. Charts will help
you to recall the basis and the
reasons for it—in previous years.
Can basis information be used to
evaluate a forward contract price?
Definitely yes. Assume, for the
sake of illustration, that just prior
to harvest a local elevator is of
fering $2.00 for com to be delivered
in April.
Noting that the current May
futures prices is $2.40 and knowing
that the usual local basis in April is
35 cents, you determine that the
sale of a May futures contract
should net you about $2.05 for your
com delivered in April 5 cents
/ higher than the elevator is of
fering.
This doesn’t necessarily mean
the elevator’s forward contract
offer might not be to your ad
vantage, however. For one thing, it
relieves you of a basis risk (the
risk that the basis in April may
turn out to be significantly wider
than the 35 cents you’ve
estimated). In addition, con
tracting with the elevator saves
you having to pay brokerage
commissions and meet margin
requirements.
Thus, while there is clearly no
answer that is right for every
farmer in every case, knowing the
normal basis in your area can help
you to arrive at the answer that is
likely to be best for you.
Similarly, if an elevator or other
buyer should happen to offer you a
“basis price” for your grain with
the actual selling price to be set at
some later time, a knowledge of
the usual basis can be useful in
deciding whether to accept the
offer. (It may be to your advantage
to accept a basis price several
cents wider than the usual basis in
order''to avoid the basis risk.)
Again, having basis information at
your fingertips can help you to
make an informed decision. "
Does a narrow basis signal a
good time to sell grain?
A narrow basis is an indication
that, for some reason or a com
bination of reasons, buyers are
currently willing to pay a higher
than usual price (in relation to
futures prices) for grain for im:
mediate delivery. This situation
may prevail nationwide or in only
a limited area.
In any case, it can pay to try to
determine the reasons for a
narrower than normal basis. It
Soil Saver
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ake the right one
Lancaster Farming, Saturday, December 19,1981—A17
could be only a temporary
situation which you may want to
capitalize on by selling your grain
while the high prices last. Or the
narrow basis could be a harbinger
of even higher prices to come. This
could be the situation, for example,
if the strong for cash grain
Correct manganese
deficiency
in field com
NEWARK, Del. Manganese
deficiency in field com can be
corrected by using an acid-forming
fertilizer banded .close to the corn
row at planting, reports University
of Delaware agronomist William
H. Mitchell.
He conducted tests last summer
at the university’s Georgetown
Substation on a sandy soil with a
pH of about 6.4 and a low residual
level of manganese. Similar soil
conditions are frequently en
countered throughout southern
Delaware.
For the trial, several nitrogen
materials were banded at varying
distances from the corn row.
Yields from three treatments were
compared with those from the
control, which received no banded
fertilizer. All treatments were
tested under partial irrigation and
dry land conditions.
Grain yield in the control plots
averaged 19.5 bushels without
irrigation and 69.8 bushels with'
partial irrigation, reports Mitchell.
Banding manganese sulfate to
Animal welfare slides available
EPHRATA - “Welfare of
Animal Agriculture,” a new audio
slide show addressing the current
question of animal rights, made its
premiere appearance at the recent
meeting of the Century Club of the
Pennsylvania Farmers’
Association.
Produced for PennAg Industries
Association, the 16-minute
presentation stresses the
relationship between the livestock
farmer and his animals. Through
music, dialogue, and the use of full
color farm scene slides, the show
is due to a present or potential
shortage.
Send your questions about
futures trading to Farming’s'
Futures, Lancaster Farming
Newspaper, Box 366, Lititz, PA
17543.
supply two pounds of manganese
per acre increased dry land and
irrigated yields to 32.8 and 87.2
bushels, respectively. With the
addition of an acidifying fertilizer
such as ammonium sulfate, the dry
land and irrigated yields increased
to 48.2 and 105.7 bushels.
Soil pH values in the fertilizer
bands dropped from 6.4 for the
control, to 6.0 and 4.8 for the
manganese and ammonium
sulfate treatments, respectively.
The acidifying fertilizer lowered
the soil pH and increased! the
availability of manganese to the
com plants, he says. All of the
ammoniacal nitrogen sources
tested were effective in lowering
soil pH and increasing the
solubility of manganese.
“Since banded fertilizer supplies
nitrogen in addition to enhancing
manganese absorption through pH
adjustment, it is the most
economical approach to
manganese deficiency" problems
on many Delaware farms,” the
agronomists concludes.
depicts a realistic look at modem
livestock farming.
PennAg, the statewide trade
organization of agribusiness firms,
is releasing the slide show for
public use and already several
showings have been scheduled.
For more information about the
presentation, contact PennAg
Industries Association, Box 329,
Ephrstta, PA 17522, (717) 733-2238.
PennAg also offers another slide
show to the public, Careers in
Agribusiness. For more in
formation about this presentation,
contact the above.
PAUL B.
gIMEODIIFOiIMn?
c
AUTOMATIC CATCH GATE
AVAILABLEWITH
PAUL B. ZIMMERMAN, INC.
Hardware • Farm Supplies
Custom Manufacturing • Crane Service
Box 128 R D. #4, Lltitz, PA 17543
Wood Corner Rd.
1 Mile West of Ephrata
Phone 717-738-1121
FEATURES
• Easily Operated By
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• Easily Adjustable
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• Double Link on
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