—
A balmy April warmed the soil and allowed for a record pace of corn planting this year. May has been cooler and is starting to remind us of last year as we had a cooler-than-normal growing season. Soybeans are going into the ground at a record clip and will likely be complete by the time many of you read this column.
The grain market's job is to discover the value of the products, by bringing all of the collective intelligence into the market place.
One has to understand that all of the news, information and ideas are factored into the prices that we see today. With the speed of communication and transportation, the news travels faster than ever before. This is the role that the market plays in agricultural trade - price discovery.
The price is discovered on the trading exchanges around the world. There is one part of the price that is discovered locally; in every place that grain changes hands. That is the basis. The basis, in its simplest definition, is the difference between the futures price established on the trading exchange and the local price. Typically, this is made up of transportation cost to the futures delivery point and the local supply and demand.
The easiest way to look at basis is to view it as a "snap shot" of local supply and demand. When the U.S. Department of Agriculture releases its supply and demand report, it indicates their estimate of U.S. and global supply and demand. These figures illustrate the "fundamentals" of grain economics. Agricultural economists will study these numbers, make historical comparisons and attempt to forecast the future value of the grain.
You don't have to be an agricultural economist to study the basis. As a student of your business, you should be very aware of the local supply and demand. You know how the crops are growing and who is buying and who is selling grain. The most powerful method of studying this is by following the basis bids in your local markets.
When someone needs to buy grain and no one wants to sell, they have to bid the basis up to try and attract bushels. If everyone wants to sell and no one wants the buy the basis bids will widen out to deter bushels away from the market.
During the next several months, you will want to continue studying the basis if you have "hedged-to-arrive" or "futures only" cash contracts to deliver upon. These contracts already have the futures price component established and the basis is left open until it is fixed before delivery. This is the place that you can increase your margins. With the volatility that we have experienced in the grain markets these last few years, there have been some tremendous opportunities to fatten your margins by locking in the basis at the opportune moment.
As you run your numbers through your margin calculators, plug in a 10-cent improvement in the basis and see what a difference it can make. Sometimes a mere 10 cents a bushel can be the difference between breaking even and making a profit. By becoming a student of your business and capturing the opportunities that the local supply and demand offers, you will find the grain angle that may allow you to participate in equity management: the accumulation of wealth over the number of years in business.
<center>...</center><i>Grain Angles is written by Tom Neher, AgStar Financial Services vice president of agribusiness and grain specialist from Rochester, Minn.</i>
