Abilene, Texas
September 6, 2004
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. |