Maximize Farm Income by Understanding & Managing Grain Basis
For many grain farms, summer is time to finish shipping stored grain. I am fortunate to be located in an area with many strong markets for grain in Illinois, which has led to historically strong basis in this area. That leads me to the questions: What is grain basis, what controls it and why is it important?
Basis is important to grain farms as it directly impacts what they are paid for their production. Simply defined, it is the difference between the futures prices and the cash price received. A popular misconception, however, is that grain merchandisers control the basis level. While this is somewhat true in that they decide what they will pay for grain, the basis is really established by local supply and demand for the product and the transportation cost to bring product in from another area. The price they will be required to pay is essentially derived from local supply and demand.
The concept of basis in grain marketing has been around for decades, evolving with changes in agricultural practices and market structures. Historically, basis has been influenced by regional production levels, transportation developments and market access. Understanding this history can help farmers appreciate current trends and prepare for future shifts.
What Impacts Grain Basis?
DTN publishes a corn basis map of the U.S. A quick look shows a variation in corn basis across Minnesota, Wisconsin and Illinois of nearly $0.50. This amounts to over 10% of the value of a bushel of corn differential just due to location. For example, the corn basis map shows areas closer to major rivers, railways or ethanol markets often have a stronger basis due to lower transportation costs.
Modern technology plays a significant role in basis management. Digital tools can provide farmers with real-time data on local and national basis trends, allowing for more informed decision-making. These technologies help farmers analyze market conditions and plan their sales strategies more effectively.
Looking ahead, several factors could impact grain basis. Changes in transportation infrastructure, like improvements in rail networks or the expansion of river ports, could alter basis patterns. Additionally, global trade dynamics and climate change may influence local supply and demand, thereby affecting basis.
Why Basis in Grain Marketing Important?
Basis creates opportunity for farmers. Every location will have a different dynamic in this regard, but understanding your local markets can lead to opportunities to take advantage of basis fluctuations.
Modern grain farms are well-positioned to capitalize on this, as many farmers have made significant investments in grain facilities. Spending time learning and understanding your local markets can create opportunities for the future.
When farmers control the physical grain, they are still in a position to take advantage of basis opportunities. As we continue to see the expansion of on-farm grain handling and storage, basis management will become a larger cash flow driver for farms. Understanding how to use and manage basis to your advantage will be key to making these investments pay off.
Simplifying Grain Marketing
Navigate pre-harvest grain sales for 2024 using expert strategies from Ed Usset.