Better Farming February 2017

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Better Farming

February 2017

BETTER

BUSINESS

Basis contracts: what they are and when

to use them

Just as the grain markets change, so should the techniques farmers use to navigate the markets,

according to some commodity experts.

by JENNIFER JACKSON

hen it comes to contracting

grain, it can be easy to get

lost in the various termi-

nology – especially when deciding

between contract types, such as basis

and flat price contracts.

Stephen Kell, a grain merchandis-

er with Parrish & Heimbecker,

knows the importance

of properly using the

different contracts

according to the

market environment.

“Farmers should

look at their selection

of grain contracting

tools (different con-

tract types) the same

way they’d look at a set

of wrenches when they

are working on a piece

of machinery,” he said.

Market situations

vary and require different types of

contracts – much like how wrenches

fit on different sizes of nuts.

“Trying to use the wrong sort of

contracting tool based on the way

the market has set up does not work

any better than trying to use a

five-eighths wrench on a three-

quarter nut,” says Kell.

More specifically, a basis contract

– as opposed to a flat price contract

– is an example of a

tool that can be very

useful under the

proper circumstanc-

es and risky when

not.

This month, Kell,

Frank Backx (com-

modity analyst and

trader for Hensall

District Co-opera-

tive) and Jenny

Moyse (grain

originator for

Cargill’s Melbourne

location) delve into the topic of basis

contracts. These experts explain how

basis contracts can bring either risk

or benefit to the producer depending

on market conditions.

What is basis?

To understand basis contracts, one

must first develop a good under-

standing of basis.

“Basis is all of the market valua-

tion factors which exist between the

point of the grain transaction and

the commodity futures market,” said

Kell. “The Chicago Mercantile

Exchange (CME) corn futures

contract is what corn is worth

delivered to Chicago. The factors

(that) differentiate the value of the

commodity in our marketplace from

the Chicago delivery point, such as

freight, handling, local supply and

demand differences, are all rolled up

into the basis portion of the price.”

When contracting grain at an

elevator, for example, basis is a

component of the flat price you

receive when signing the contract,

according to Moyse.

Stephen Kell

“Basis is all of the market valuation factors which exist between the point of the grain

transaction and the commodity futures market,” said Stephen Kell.

DarcyMaulsby/iStock /Getty Images Plus photo