ECON%20337:

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ECON 337 Agricultural Marketing

Chad Hart Associate Professor chart_at_iastate.edu 51
5-294-9911
Lee Schulz Assistant Professor lschulz_at_iastate.edu
515-294-3356
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Basis

• Basis Cash Futures
• Futures reflect global supply and demand
• Basis reflects local supply and demand
• Cash Futures Basis

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Basis Basics

• Specific to time and place
• Typically use nearby futures
• Convergence
• Less variable than cash prices
• Relatively predictable

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Basis Factors

• Relative storage capacity
• Transportation availability and cost
• Time to expiration
• Quality issues

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Basis Terms
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Interior Iowa Daily Grain Prices
http//www.ams.usda.gov/mnreports/nw_gr110.txt Clo
sing cash grain bids offered to producers as of
130 p.m. Dollars per bushel, delivered to
Interior Iowa Country Elevators. US 2 Yellow
Corn Prices were mostly 3 cents higher for a
state average of 3.63. US 1 Yellow Soybean
Prices were mostly 4 cents lower for a state
average of 9.23. Iowa Regions 2
Yellow Corn 1 Yellow Soybeans
Range Avg Range
Avg Northwest 3.61
3.70 3.64 9.18 9.28 9.24 North
Central 3.56 3.73 3.64 9.15 9.28
9.22 Northeast 3.56 3.76
3.66 9.05 9.31 9.18 Southwest
3.33 3.68 3.55 9.08 9.31 9.21
South Central 3.51 3.67 3.57
9.18 9.25 9.22 Southeast
3.43 3.75 3.63 9.20 9.44
9.30 Corn basis to STATE AVERAGE PRICE for the
CBOT MAR contract is -.24 Soybean basis to STATE
AVERAGE PRICE for the CBOT MAR contract is -.50
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Specific to Time and Place
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Average Iowa Corn Basis, 2007-11
Source
http//www.extension.iastate.edu/agdm/crops/pdf/a
2-41.pdf
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Iowa Corn Basis, May Futures, 2007-11
Source
http//www.extension.iastate.edu/agdm/crops/pdf/a
2-41.pdf
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Iowa Corn Basis, May Futures, 2007-11
Source
http//www.extension.iastate.edu/agdm/crops/pdf/a
2-41.pdf
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Data Source USDA/AMS
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Data Source USDA/AMS
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Basis Information

• ISU Extension and Outreach, Ag Decision Maker
• Corn http//www.extension.iastate.edu/agdm/crops/
  html/a2-41.html
• Soy http//www.extension.iastate.edu/agdm/crops
  /html/a2-42.html
• Cattle http//www.extension.iastate.edu/agdm/lives
  tock/html/b2-42.html
• Hogs http//www.extension.iastate.edu/agdm/livest
  ock/html/b2-41.html
• USDA-Ag. Marketing Service
• http//www.ams.usda.gov/mnreports/lsddgr.pdf
• http//www.ams.usda.gov/mnreports/nw_gr110.txt
• Local elevators, ethanol plants, processing
  plants, etc.

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• Basis and price forecasting tool
• Enter specific information
• Location
• Date
• Weight
• Frame score and grade
• Sex
• Number

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Sex Steer
Frame Lg Med/Lg
Grade 1
Head 100
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Sex Steer
Frame Lg Med/Lg
Grade 1
Head 100
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Seasonal Price Patterns Basis

• Period of increasing supplies, prices are
  expected to decline.
• Cash market reflects today's supply conditions
  and price.
• Futures market reflects upcoming conditions of
  expected larger supplies and lower prices.
• Basis may be very narrow or cash price may be
  above futures.
• i.e., Hogs mid-August to mid-September.
• Period of decreasing supplies, prices are
  expected to increase.
• i.e., Hogs late-Dec and early-Jan against the
  Feb futures.
• Seasonal price period of relatively large
  supplies and low cash prices, but the Feb futures
  contract reflects a delivery period of expected
  smaller supplies and higher prices.
• Low cash prices and high futures translate into a
  wide basis.

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Threat of Delivery Basis

• Hedgers can deliver on a futures contract.
• If enough producers deliver on futures contracts,
  cash prices will tend to move up relative to
  futures.
• The threat of delivery tends to limit how wide
  the basis will be during the delivery period.
• The variation in basis during delivery periods
  tends to be less than during periods with no
  delivery option.

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Grain Basis vs. Livestock Basis

• Grain is a storable commodity and the same grain
  can be used to satisfy several futures contract
  delivery months. So grain futures prices tend to
  be tied to one another.
• Livestock is not storable so livestock futures
  prices for alternative delivery months tend to
  move independently.
• Because grain is a storable commodity, the grain
  basis is tied closely to grain storage costs and
  interest costs. Livestock are not storable so
  there are no storage costs built into the basis.

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Grain Basis vs. Livestock Basis

• An inverse basis in grain futures (cash above
  futures) is unusual and indicates there is
  something amiss in the grain industry (lack of
  transportation, for example). An inverse basis in
  grains will usually last only for a short period.
  
• An inverse basis in livestock futures is not
  unusual for distant delivery contracts and can
  exist for extended periods of time. Only during
  the nearby futures contract delivery periods do
  we expect livestock futures to be above cash
  price.

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Convergence
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Convergence Issues

• Typically, as futures contracts reach maturity,
  futures price and cash prices at delivery points
  tend to converge to the same level.
• For several grain and oilseed futures contracts
  over the last few years, this has not occurred.
• Poor Convergence Performance of CBOT Corn,
  Soybean and Wheat Futures Contracts Causes and
  Solutions
• Scott Irwin, Philip Garcia, Darrel Good, and
  Eugene Kunda
• University of Illinois, March 2009

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Why Is Convergence An Issue?

• Non-convergence indicates the market is
  out-of-balance.
• When a contract is out of balance the
  disadvantaged side ceases trading and the
  contract disappears. (Hieronymus, 1977)
• Non-convergence adds to the uncertainty in basis
  and limits hedging effectiveness.

Source Irwin, Garcia, Good, and Kunda,
2009 Marketing and Outlook Research Report 2009-02
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Factors

• The relationship between the spread between
  futures contracts and the cost of carry (think
  storage costs)
• In the settlement process for corn and soybean
  futures, the delivery instrument is a shipping
  certificate.
• If it is advantageous to the holder of a shipping
  certificate, they can delay delivery and
  effectively store the grain, paying CBOT set
  storage costs.
• Structural issues related to the delivery process
• Does the general trade flow of the commodity line
  up with the possible delivery points under the
  futures contract?

Source Irwin, Garcia, Good, and Kunda,
2009 Marketing and Outlook Research Report 2009-02
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Delivery Points
How much of the commodity is moving through the
delivery point areas?
Corn
Soybeans
Wheat
Source Irwin, Garcia, Good, and Kunda,
2009 Marketing and Outlook Research Report 2009-02
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• Class web site
• http//www.econ.iastate.edu/chart/Classes/econ337
  /Spring2015/
• Lab in Heady 68.