Fall 2017 Logan County
Farm Outlook Magazine

Understanding “basis” and how it can improve farm profitability
By  Nila Smith

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[October 31, 2017]  In the agricultural industry the word “basis” is used daily when planning when to sell a crop to gain the most profit. While many may be able to understand and interpret basis in their minds and on paper, being able to explain it out loud can be more challenging.

The foundation of basis comes from the mathematical equation of Current Cash Price minus Chicago Board of Trade (CBOT) commodity futures.

Basis can be reported as strong or weak.

A weak basis is when the above mathematical formula yields a negative conclusion. A strong basis is when the outcome of the formula yields a positive conclusion.

Examples: $3.15 – $3.48 = -.35
In this example, the cash price on October 18, 2018 was $3.15 while the futures price for January 2018 was 3.48. The basis then equaled -.35 or 35 cents under, a weak basis.

In another example: $3.15 – $2.78 = +.37 equates to the market being strong. Market experts would refer to this as 37 cents over in their reports.

But what do the ‘over’ or ‘under’ outcome mean to the farmer?

A weak (under) market is an indicator that the supply versus demand is telling buyers that there is more product on hand than will be needed in the near future. Surplus product consequently drives the cash price down. Many times this figure is driven by a ‘prediction’ of upcoming harvest figures. The futures will stay higher, but can also drop if and when it is discovered that the prediction was correct.

If the futures price begins to fall at a rate that exceeds the decline in the cash price, then market analysts will designate the scenario as “weak and narrowing.”

A strong (over) market means that future buyers are anticipating there will be a larger demand for product than sellers can supply in the immediate future.

Prices quoted on the CBOT are based on points of time in the future, i.e. the term “futures” is often associated with the CBOT prices. As the cash price dates draw close to the futures month, the basis between cash and futures will most often narrow. When the futures price month changes to another point in the future, the basis will widen.

For example, in the month of August 2017 the futures price quote was based on a September end date:
On August 2nd, the Illinois USDA reported the average cash price for corn at $3.40 with a -.305 basis for September. On August 30th the basis dropped to -.22 because the date was extremely near the futures end date.

In start contract, when September rolled around, the futures end date changed to December and the basis immediately jumped up to -.375.

There are also other factors that can influence basis that are not visible in a market report. Supply and demand is simple, but other factors include storage costs and interest, and transportation costs. These factors impact regional basis figures, as do geographical variations.

Basis is figured using CBOT with the cash price at local elevators. Cash prices in local elevators can vary according to the state and even the region of the state. For example, the Illinois USDA records cash prices by regions including Northern, Western, North Central, South Central, Wabash,
W.S. West, and Little Egypt.

On October 18th, 2017, those prices were reported as below:

Commercial grain prices paid farmers by Interior Illinois Country Elevators after 2.00 p.m. are listed below in dollars per bushel:


US 2


US 1


 US 2




3.01 - 3.19

9.19 - 9.40



3.01 - 3.10

9.22 - 9.39



3.08 - 3.22

9.39 - 9.54



3.05 - 3.20

9.31 - 9.46



3.14 - 3.23

9.33 - 9.46



3.03 - 3.21

 9.32 - 9.47



3.01 - 3.17

9.16 - 9.34


The cash prices recorded for the Wabash Region had the highest price range of all. The reason for this is based on geography as well as regional conditions. The region which borders the Wabash River and the Indiana State line has seen large amounts of rain throughout the growing season, rain significant enough to hinder planting, damage standing crops, and possibly impact the ability to harvest.

At the same time, the Wabash Region is high in pork production, meaning there are more producers who will feed their harvest to livestock, meaning there is possibly less corn for sale at local elevators, creating a sense that demand in the region outweighs the supply.

Looking back at the same region on August 2nd, Wabash cash corn was much higher than it is in October at $3.47 - $3.62. This is important because, the cash price is dropping as harvest gets underway; an indication that perhaps crops are yielding better than originally predicted.

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But what did all this mean for the basis? In August the futures price on the 2nd was $3.71, so the regional basis for Wabash was only -.24 to -.09 or on the average -.165; very narrow. On October 18th that basis ‘widened’ from an average of -.165 to an average of -.295, an indication that supply is approaching demand within the region.

Generally speaking, any circumstance that impacts the price of a commodity will also impact the basis. This can be anything from weather conditions starting right before planting season all the way through to harvest; availability of transportation such as trucking, rail car or barge; and the cost of transportation. Of course yields at harvest impact the price as well.

Savvy marketers will use this information to map out the market trends throughout the year, and over time will be able to predict widening and narrowing of basis by watching the subtle daily shifts.

According to a publication issued by the Chicago Board of Trade, understanding basis and using it can turn less than perfect years into profitable ones through hedging on the CBOT with futures, but also through making wise choices on when to store or sell on the cash market

That document reports the following:

Knowing the usual basis and basis pattern for the commodities you buy or sell will help you make more informed decisions about:

Whether to accept or reject a given price

Using historical basis information, is a particular cash bid or offer attractive? Or would you be better off hedging your price risks and waiting for the basis to improve?

Which buyer or seller to use

Bids and offers reflect different basis levels. Check around to see which buyer or supplier is bidding or offering the most attractive basis.

When to purchase, sell, or store a crop

Does the current price reflect the average basis or is it stronger or weaker? What do you anticipate happening in the market?

When to close, or “lift,” a hedge

If the basis improves or equals your estimated basis level, it could be a sign to purchase or sell a commodity and close your hedge.

Whether, when, and in what delivery month to hedge

Is the basis quoted off of a deferred futures month more attractive than the nearby futures month?

And when and how to turn an unusual basis situation into a possible profit opportunity

Merchandisers and basis traders make a living managing basis levels. They must keep their eyes open for unusual basis patterns to improve profit margins or avoid losses, while maintaining their bids and offers at a competitive level.

In conclusion, while basis consists of a simple mathematical equation of cash minus futures, it can be a valuable tool in the helping local producers to maintain profitability under less than ideal conditions.

[Nila Smith]


Understanding commodity futures Basis - Go Futures – CBOT guide book

Corn and Soybean Price Basis | Ag Decision Maker


Understanding Basis Signals In The Grain Markets

Understanding and Using Basis – Grains

The Farmer’s Grain Marketing Guide


Read all the articles in our new
Fall 2017 Logan County
Farm Outlook Magazine

Analysis of the 2017 Season 4
Weeds plentiful in the field this year 10
Developing smart drainage and its role in better productivity 15
Corn Genetics:  The savior and the great destroyer 20
Understanding "basis" and how it can improve profitablilty 24
Farm labor:  A growing problem everywhere 29
Selling direct offers producers new opportunities 33
Five critical areas to focus on with your lender 39
Low grain prices and stress on the family farm 44

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