Understanding How Local Market Shifts Affect Your Bottom Line
When offered a bid from a buyer, how can you tell if it’s worth taking? Looking to futures prices is helpful, but only tells part of the story. Those prices don’t take into account local market factors affecting cash prices.
The rest of the story lies in crop basis. Basis is the difference between the cash price at a specific market and the nearest futures price. That difference reflects costs such as storage and transportation, as well as local supply and demand.
Tracking basis trends in your markets can help you decide whether to sell your soybeans now, enter into a cash forward contract, or hedge with futures and sell later. If you’re offered a price above the typical basis in your area, you know you’re getting a good value on your sale.
Dr. Darrel Good, professor emeritus of agricultural and consumer economics at the University of Illinois at Urbana-Champaign, explains how farmers can put this concept into practice.
“If the current spot soybean price in a local market is 50 cents less than the nearest futures price, and cash price at that market this time of year is typically 20 cents less, the basis is considered weak,” he said. “This signals that the crop should be stored rather than sold for immediate delivery.”
The relationship between cash and futures prices tends to shift throughout the year due to fluctuating supply and other factors. Over time, these shifts develop into an annual pattern for local markets. Farmers can track basis shifts to chart trends and make informed marketing decisions.
“There are some good sources of general basis information online,” said Good. “However, farmers need to archive futures prices and cash prices for their local markets in order to understand whether current basis is strong or weak.”
For farmers wanting to start using basis to make smart marketing decisions, Good recommends focusing on two things.
Click here to see more...