{"id":600,"date":"2023-11-14T21:52:27","date_gmt":"2023-11-14T21:52:27","guid":{"rendered":"https:\/\/welcome.combyne.ag\/resource-centre\/?p=600"},"modified":"2023-11-20T22:05:57","modified_gmt":"2023-11-20T22:05:57","slug":"the-basics-of-basis","status":"publish","type":"post","link":"https:\/\/welcome.combyne.ag\/resource-centre\/the-basics-of-basis\/","title":{"rendered":"The Basics of Basis"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_58 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\" role=\"button\"><label for=\"item-6a09c9b4efdf7\" ><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input aria-label=\"Toggle\" aria-label=\"item-6a09c9b4efdf7\"  type=\"checkbox\" id=\"item-6a09c9b4efdf7\"><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/the-basics-of-basis\/#What_is_%E2%80%9Cbasis%E2%80%9D\" title=\"What is &#8220;basis?&#8221;\">What is &#8220;basis?&#8221;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/the-basics-of-basis\/#How_is_basis_derived\" title=\"How is basis derived?\">How is basis derived?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/the-basics-of-basis\/#Basis_%E2%80%93_delivered_a_particular_location\" title=\"Basis \u2013 delivered a particular location\">Basis \u2013 delivered a particular location<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/the-basics-of-basis\/#Whats_a_%E2%80%9Cgood%E2%80%9D_basis\" title=\"What\u2019s a \u201cgood\u201d basis?\">What\u2019s a \u201cgood\u201d basis?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/the-basics-of-basis\/#A_Wide_Basis\" title=\"A Wide Basis\">A Wide Basis<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/the-basics-of-basis\/#A_Narrow_Basis\" title=\"A Narrow Basis\">A Narrow Basis<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/the-basics-of-basis\/#Changing_basis_levels\" title=\"Changing basis levels\">Changing basis levels<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/the-basics-of-basis\/#Strong_Price_Wide_Basis\" title=\"Strong Price \/ Wide Basis\">Strong Price \/ Wide Basis<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/the-basics-of-basis\/#Strong_Price_Narrow_Basis\" title=\"Strong Price \/ Narrow Basis\">Strong Price \/ Narrow Basis<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/the-basics-of-basis\/#Weak_Price_Wide_Basis\" title=\"Weak Price \/ Wide Basis\">Weak Price \/ Wide Basis<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/the-basics-of-basis\/#Weak_Price_Narrow_Basis\" title=\"Weak Price \/ Narrow Basis\">Weak Price \/ Narrow Basis<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/the-basics-of-basis\/#Whats_a_basis_contract\" title=\"What\u2019s a basis contract?\">What\u2019s a basis contract?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/the-basics-of-basis\/#Basis_contract_tips\" title=\"Basis contract tips\">Basis contract tips<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"What_is_%E2%80%9Cbasis%E2%80%9D\"><\/span>What is &#8220;basis?&#8221;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>A tool to increase your price per bushel.<\/p>\n<p>\u2022 Basis determines the cash price of grain.<\/p>\n<p>\u2022 Basis reflects demand for grain.<\/p>\n<p>\u2022 Basis includes margins for the buyer.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_is_basis_derived\"><\/span>How is basis derived?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Basis includes the buyer\u2019s costs of handling, administration fees, some types of freight, and elevation, among others. This basis is then deducted (or added) from a futures price to arrive at a cash price. Note, in some instances, freight is NOT included as part of the basis. Basis is typically quoted delivered to a particular destination, freight to get there &#8211; not included.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Basis_%E2%80%93_delivered_a_particular_location\"><\/span>Basis \u2013 delivered a particular location<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>For this example, let&#8217;s say today is January 11, 2008. Your farm is located in Wetaskiwin and a buyer quotes a canola price of 20 under the March futures, delivered Edmonton, for February through March movement. You heard on the radio that the March canola futures closed at $573.20\/MT. Then:<\/p>\n<p style=\"text-align: right;\">Winnipeg Commodity Exchange March canola futures: $573.20<\/p>\n<p style=\"text-align: right;\">Basis: -$20.00<\/p>\n<p style=\"text-align: right;\">Your price, delivered to Edmonton: <strong>$553.20 (or $12.55\/bu)<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p>The price of $553.20 does NOT, however, include freight. You can haul it yourself or hire a trucker. There are more calculations to perform before you reach a price \u201cat the bin\u201d.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: right;\">Delivered price to Edmonton: $553.20<\/p>\n<p style=\"text-align: right;\">Freight cost from Wetaskiwin to Edmonton: -$8.00<\/p>\n<p style=\"text-align: right;\">Net cash price, at the farm gate: <strong>$545.20 (or $12.37\/bu)<\/strong><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Whats_a_%E2%80%9Cgood%E2%80%9D_basis\"><\/span>What\u2019s a \u201cgood\u201d basis?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Basis reflects simply supply and demand theories. What a \u201cgood\u201d basis IS can change from year to year. The more in demand the grain becomes, the \u201cnarrower\u201d the basis can become. If the grain is not required, the basis can become \u201cwider\u201d.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-643\" src=\"https:\/\/welcome.combyne.ag\/resource-centre\/wp-content\/uploads\/2023\/11\/Frame-44142-1.png\" alt=\"\" width=\"2905\" height=\"596\" \/><\/p>\n<p>In the illustration above, consider \u201c0\u201d to be current price of a futures contract trading on the Winnipeg Commodity Exchange. If a buyer talks about the basis being \u201coption\u201d, that simply means the basis is zero. The other numbers are commonly seen basis levels for our canola market. The more negative (called wide) the number is, the more benefit to the buyer. The more positive or closer to zero (called narrow) the number is, the more benefit to the producer.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"A_Wide_Basis\"><\/span>A Wide Basis<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>At harvest time, basis is usually wide. A wide basis reflects ample grain supply. Basis is typically wide at harvest because farmers are eager to deliver grain to receive much needed cash or due to lack of bin space. Buyers have a captive audience. Basis tends to be towards the left portion of the above line. If there happens to be a drought, though, resulting in less supply, the basis may not be wide.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"A_Narrow_Basis\"><\/span>A Narrow Basis<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>During seeding time, demand for canola is still active but most producers are busy and not so eager to deliver grain. Buyers may narrow the basis (offer a premium) to entice farmers to deliver grain. Basis tends to be towards the centre or right of the line. A narrower basis indicates the grain is in demand.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Changing_basis_levels\"><\/span>Changing basis levels<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>When basis levels are observed along with futures prices, there are four situations which give signals to the producer about grain marketing strategies. The more options a producer has when marketing grain, the better chance of an increased price per bushel.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-642\" src=\"https:\/\/welcome.combyne.ag\/resource-centre\/wp-content\/uploads\/2023\/11\/Frame-44142-3.png\" alt=\"\" width=\"2905\" height=\"848\" \/><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Strong_Price_Wide_Basis\"><\/span>Strong Price \/ Wide Basis<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>When futures markets are strong, it\u2019s usually because of tight supplies internationally but at a local level, there could be an ample supply of grain, thus, the wide basis. Strategies:<\/p>\n<p>\u2022 open basis contract (if you can find one)<\/p>\n<p>\u2022 short the futures<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Strong_Price_Narrow_Basis\"><\/span>Strong Price \/ Narrow Basis<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Demand is outpacing local availability of product. Buyers are taking less margin (narrowing the basis) as an incentive to encourage farmers to deliver grain. Strategies:<\/p>\n<p>\u2022 deliver grain (market signals in farmer\u2019s favour)<\/p>\n<p>\u2022 lock-in basis and futures (deferred delivery for new crop)<\/p>\n<p>\u2022 short the futures<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Weak_Price_Wide_Basis\"><\/span>Weak Price \/ Wide Basis<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>A typical harvest situation. Futures can be lower due to ample supply at an international level. Basis levels are wide at a local level due to ample supply. A buyer with grain in-store may widen basis levels to discourage immediate delivery (if they\u2019re full) which also reduces prices at the local level. Strategies:<\/p>\n<p>\u2022 store grain (market signals against the farmer)<\/p>\n<p>\u2022 buy call options<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Weak_Price_Narrow_Basis\"><\/span>Weak Price \/ Narrow Basis<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>At an international level, the futures are low. At a local level, demand is high for product. Buyers are narrowing basis as an incentive for farmers to deliver grain. Strategies:<\/p>\n<p>\u2022 deliver grain and go long the futures<\/p>\n<p>\u2022 lock-in basis<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Whats_a_basis_contract\"><\/span>What\u2019s a basis contract?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Sometimes, a basis level comes along that says to the canola grower, \u201cPick me! Pick me!\u201d Attractive basis levels present themselves for different reasons, at different times, throughout the year. A more narrow basis can be a market signal for the producer to lock-in just the basis portion of his canola price and hope for the futures to further increase. Most line companies and crushers will have basis contracts available to farmers. A basis contract looks like this:<\/p>\n<p>&nbsp;<\/p>\n<p><em><strong>Futures price (unknown) less basis (known) = cash price (unknown)<\/strong><\/em><\/p>\n<p>&nbsp;<\/p>\n<p>Let&#8217;s look at our example again. You may have wished to lock-in some canola for the fall of 2008 but thought the futures market had room to rally, however, a fairly narrow basis level (for fall time, anyway) WAS available from a local buyer. In this case, the buyer used November 2008 futures for October 2008 deliveries:<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-644\" src=\"https:\/\/welcome.combyne.ag\/resource-centre\/wp-content\/uploads\/2023\/11\/Screenshot-2023-08-22-at-4.45-1.png\" alt=\"\" width=\"2905\" height=\"2400\" \/><\/p>\n<p>So, you locked-in the basis (the previous year when the narrower basis was available) and now continue to keep a sharp eye on the futures. To price the futures portion of this equation, most buyers establish the last trading day, of the previous month (to the futures month being used), as the final day to execute this. In this example, October 31, 2008 would be the last day to price out this basis contract. What\u2019s happened to futures and basis levels since the basis was locked-in the previous year? So far in this example, by January 14, 2008, the basis has widened from 20 under to 40 under and the futures have risen considerably. The difference between locking-in the 20 under basis and the current 40 under basis, works out to over $800 per SuperB load! The most important decision to make with a basis contract is actually implementing a plan as to when to pull the trigger and price out the futures.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Basis_contract_tips\"><\/span>Basis contract tips<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>\u2022 Use basis contracts as one part of your grain marketing plan.<\/p>\n<p>\u2022 Remember &#8230;. If you sign a basis contract, be prepared to deliver the grain to the buyer as specified.<\/p>\n<p>\u2022 Review each buyer\u2019s particularities &#8230; some may require the futures to be priced out during active trade, some may not.<\/p>\n<p>\u2022 Some buyer\u2019s allow you to price out the futures in allotments as small as 20 MT at a time, great for \u201caveraging up\u201d strategies.<\/p>\n<p>\u2022 Basis contracts can be found for nearby deliver periods or even up to two years in advance.<\/p>\n<p>\u2022 Find out what the penalties are IF you get hit with drought or hail and have NOT priced out the futures portion of your contract.<\/p>\n","protected":false},"excerpt":{"rendered":"What is &#8220;basis?&#8221; A tool to increase your price per bushel. \u2022 Basis determines the cash price of grain. \u2022 Basis reflects demand for grain. \u2022 Basis includes margins for the buyer. How is basis derived? Basis includes the buyer\u2019s costs of handling, administration fees, some types of freight, and elevation, among others. This basis [&hellip;]\n","protected":false},"author":13,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[4],"tags":[18,14,20,15,17,19],"class_list":["post-600","post","type-post","status-publish","format-standard","hentry","category-crop-contracts","tag-basis","tag-combyne","tag-crop-contract","tag-crop-marketing","tag-farming","tag-futures"],"_links":{"self":[{"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/posts\/600","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/users\/13"}],"replies":[{"embeddable":true,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/comments?post=600"}],"version-history":[{"count":15,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/posts\/600\/revisions"}],"predecessor-version":[{"id":664,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/posts\/600\/revisions\/664"}],"wp:attachment":[{"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/media?parent=600"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/categories?post=600"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/tags?post=600"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}