Wheat producers who understand basis are more likely to be successful and profitable marketers, according to a Texas Cooperative Extension economist.

"As marketers we pay a lot of attention to local cash prices and futures prices. But it's also important to have a good understanding of basis," said Stan Bevers, Extension economist based at Vernon, addressing producers at the Aug. 17 Big Country Wheat Conference. "Simply put, basis is the difference between your local elevator cash price and the price of a futures contract at the Kansas City Board of Trade or the Chicago Mercantile Exchange.
"If you pay attention to the futures markets, you have probably noticed that when nearby futures contract prices rise the odds are pretty good that prices on later futures contracts will also rise. Wheat futures prices typically peak several months after harvest, whereas local cash prices for the past four years have peaked after fall planting."

Producers typically think about pricing their wheat at harvest on the local cash market. It may be wise to consider pricing a portion of the wheat crop earlier in the year – in January, February or even mid-March when peaks in futures prices typically occur. These peaks often occur when the United States Department of Agriculture releases its seasonal crop reports, Bevers said.

"So where does basis fit in? Basis is less volatile and more predictable than price. And basis typically strengthens between harvest and January," he said.

"So how do we use basis? Remember, when you lock in a price by forward contracting you have also locked in a basis. Wheat prices are seasonal. We typically see some seasonal strength in cash prices between harvest and November – the three-year average increase is about 70 cents. Futures prices, on the other hand, are strongest between January and March. After that, on average they drop about 20 cents before settling at a harvest low," he said.

Based on these price patterns, February through April may be a good time for producers to price some of their wheat crop, Bevers said.

"We can forward contract, sell futures, buy put options, sell call options or use a basis contract to price our wheat. If we take a forward contract, we have locked in basis and a price," Bevers said. "If we sell futures, buy puts or sell calls, we are not locking in basis.

"When basis and futures prices are strong, consider a forward contract. When basis and futures prices are weak, sit tight ... putting it in the loan may be your best bet. If futures prices are strong, but basis is weak, consider selling futures or using puts and calls. And if futures prices are weak, but basis is strong, consider a basis contract or a synthetic basis contract. Just remember that wheat basis contracts are not widely offered in Texas."

Bevers reminded producers that marketing is a continuous process. He recommended they stay abreast of cash prices, futures prices and basis and use familiar marketing tools when pricing their crop.

"Use the marketing tools you are most comfortable with. Remember that futures and basis are separate things. Know them both and use them in your marketing plan," he said. "Marketing is a lot like baseball. The percentage of hits you achieve is what counts. Develop a solid marketing plan and be prepared to execute it."

More information on basis and using basis as a marketing tool is available online at: http://jenann.tamu.edu/resources/basis/.

Extension's market outlook for livestock and crops, and host of Information on farm policy, crop insurance, commodity budgets and marketing programs is available at: http://agecoext.tamu.edu.