What’s Your Basis

I am a firm proponent of using hedges to lock in your cost of production when you can.  However, you must not just look at what your commodity price is trading at on the relevant exchange.  You need to determine what your basis is and how it compares to the historical trends.

Basis is the difference between what your local elevator, ethanol plant or other buyer is willing to buy your crop for and what the price is on the exchange.  For example, assume you can sell your corn locally for $3.85 per bushel and on the exchange it is selling for $4.25.  Your basis is in this case a negative 40 cents. 

For growers that are far away from the end user of the product, their basis is normally quite negative compared to other growers.  This is due to the cost of shipping the product to market.  A grower with several ethanol plants competing for product will normally create the best basis for corn growers (in many cases you will have substantial positive basis, while a wheat grower in Montana that has to ship his product by rail to Seattle to ship it overseas will have a very negative basis).

After determining what your basis is, you need to review how the current basis compares to the trends over the last several years.  This comparison of the deviation from the normal trend will give you data as to whether you expect it to narrow toward or away from the exchange price.  This can effect whether you want to put on a hedge or use some type of forward contract.

The Kansas State University has a great Crop Basis and Deviation service that they provide on an almost weekly basis.  They provide a map for several mid-west states showing the current basis and the deviation from a three year average.  If you are in one of those states, bookmark this site and watch how your basis changes over time.   

As you become familiar with your basis, you will make more informed decision when and how to sell your crop.