If the grain buyer postpones his offer from February from March (CH20) to May (CK20), he will likely change his base level to ensure that he always offers for the same spot price. Under these assumptions, bushel storage through April means that spot prices must increase from 44 cents to 56 cents per bushel to break even. There is a good chance that the spot prices offered next spring will never break even. In addition, a higher moisture content for corn stored on the farm can widen the base in late winter, as larger amounts of bushels are provided to avoid moisture discounts. Claim that their base for delivery in February is $-0.15 CH20. Despite a late start, the 2013 harvest grew rapidly and yield prospects increased in most of the corn belt. The average U.S. corn yield increased by 5.1 bushels per acre from September to November, according to the latest USDA estimate. Farmers are expected to harvest a record 13.989 billion bushels in 2013. Final USDA estimates will be released on January 10. Most of the evolution of spot prices in late autumn and winter may be due to a better base.
This will encourage farmers and elevators to move stored bushels. Iowa will become a net importer of corn from neighboring states this marketing year, as Iowa will consume more corn than it produced in 2013. The placement of the hedging base is important when considering placing a hedge, as it is used to convert the price of futures contracts into an equivalent price of local cash. The base tables can be used to estimate the local net hedging price. The basis is the difference between the forward price and your local spot price. For example, if the May futures contract is trading at $2.96 and the spot price is $2.63, the spot price is 33 cents lower than the May price ($2.63 – 2.96 = -33 cents). So the base is -33 cents. “What would be your spot price today if you put futures on the base contract?” The following table compares the cost of storing corn in a commercial elevator with the cost of storing corn on the farm. Costs per bushel are reported every three months or up to nine months after harvest. Assumptions: Spot corn is valued at $4.20 per bushel; 4.5% interest rate on debt; Processing fee of 20 cents per bushel paid in advance; on-farm storage at 2 cents per bushel per month; Commercial storage at 4 cents per bushel per month. Base contracts differ from later-price contracts because the base (the difference between the local spot price and the forward price) is set at the time the contract is signed and because elevators or grain processors can pay a portion of the grain values at the time of delivery to the buyer. Geographical variations Basic models vary from one geographical area to another.
Spot prices in northwestern Iowa have always tended to be lower than in southeastern Iowa due to additional transportation costs for shipping grain to processors or export markets. However, with the expansion of biofuel production, the relative base patterns in Iowa will change. Strong local demand for grain from livestock feed and biofuel processing will drive up local spot prices and the base will shrink. The farmer is not able to use the carry offered on the futures markets with a basic contract. Hopefully, eliminating the storage costs, basic risk and quality problems of maize will have greater benefits than simply losing the capture of forward price carriers. Withdrawal of coverage When it is time to undo and the base is narrower than expected, the hedging returns will be higher than expected. In the case of inventory protection, the producer may withdraw the coverage earlier than expected if the base is unusually narrow. The difference between the local spot price and the forward price is due to transportation costs, storage costs, supply and demand, local conditions and other factors. Below is a graphical representation of a typical corn base.
It is assumed that the general price level remains constant throughout the period so that the relationship between prices can be examined. To use a basic contract, the producer wants to set an advantageous base level if the spot price is not satisfactory. Knowing how to use basic contracts to obtain a selling price for grain is the subject of the Iowa State University Extension and Outreach publication “Understanding Risk in Basis Contracts,” FM 1891. The publication was recently reviewed and updated by Hart, Associate Professor at the UIS. It`s free online at the Iowa State University Extension Store. Note that entering into a basic contract does not result in the seller opening a futures account or options or a position of futures or options. Any forward position or option taken by a buyer serves only the buyer and must be in the name of the buyer. Futures and/or options can be used as a grain price mechanism. This contract is not a futures or options contract or a commodity pool agreement.
Grain is a storable product and the same grain can be used to fulfill several months of futures delivery. Thus, grain futures prices tend to be tied to each other. Livestock is not storable, so cattle futures prices for alternative delivery months tend to move independently. Understanding what happens when you roll a basic contract can be a little more confusing than understanding what happens when you roll out an ETS contract (futures only). Thus, the $0.05 gap from CH20 to CK20 makes your base WIDER. When adopting a cash contract, the producer must determine a delivery time and destination. There is no service charge, and there is only a storage fee if the manufacturer is sold with a delayed delivery from the warehouse. Other conditions may be included between the Buyer and the Seller if both parties agree.
However, the large number of ethanol plants built in Iowa is changing that dynamic. The market focus for much of Iowa corn is now local. Thus, market developments are changing corn-based models in Iowa. Applying grain to a subsequent price contract (DPO) would allow the producer to move the grain if they feel the spot price or base is wrong. This would be an advantageous decision if the service fee, if any, is lower than the storage cost. With this opportunity, the producer can use the time for possible price improvements. However, subsequent pricing programs may not always be available, and unvalued grain could ultimately be a loss transaction in a downward trending market. A geographic area that consumes more grain than it produces is called a grain deficit area (as opposed to a grain “surplus zone”) and must import grain into the region from outside. This will increase the spot price relative to the price of futures contracts and the base will shrink. The baseline data for Iowa was calculated by subtracting thursday`s closing futures price from Thursday`s spot price. The spot price represents the price of Yellow Corn No.
2 and Modified Soybean No. 1. Spot prices were collected by each district in each district reporting prices. Since there is usually a range of several cents for cash quotes, the daily price center was used. Each table shall indicate the average base as well as the maximum and minimum base for the last five marketing years. An attractive base and the need for cash will be the main drivers for farmers to move the stored bushels. With a high farm income in 2013, farmers can wait until after the first of the year to sell bushels or defer additional income. I expect the corn base to remain attractive until the end of the year.
Basic contracts encourage the movement of maize in cash by farmers and should be considered. Commercially stored bushels are likely to have higher fixed costs than bushels stored on the farm. However, some bushels on the farm may need to be moved until the end of winter for cash flow reasons or due to corn quality issues. There are several factors when a producer wants to enter into a purchase contract. The producer may feel the need to remove grain from the farm or commercial storage. The producer may feel that the market is at a good price level and/or he believes that the market will follow a downward trend. Therefore, they set a price for nearby or delayed delivery. However, with this method of grain contraction, there is no potential for price improvement if the market were to rise. The price of the HTA contract must be set during normal trading hours on the Chicago Mercantile Exchange. The basis of supply and demand is also influenced by the conditions of supply and demand. The sale of large farmers, especially at harvest, will tend to lower the spot price, but will have little impact on the forward price.
Thus, the base of the harvest is traditionally wide (more than can be explained by the costs of storage and interest and transport). Conversely, light selling (often during spring planting) will tend to bolster the spot price, but will have little impact on the forward price. So the base will shrink. Fluctuations in export demand continue to impact the base. An ETS contract is used to cover a forward price without creating a foundation. A sales contract consists of setting a fair market price if the manufacturer considers that the price is satisfactory. Imagine it`s the end of February and your grain buyer asks you if you want to evaluate or renew this contract when the March 2020 futures contract (CH20) is about to expire. Consider using a large-scale sales strategy to use basic contracts and sell bushels stored incrementally. While most basic contracts are offered in increments of 5,000 bushels, some merchandisers may offer them in truck quantities (1,000 bushels). This fits well with a large-scale sales strategy and spreads the basic risk.