March 4, 2022
Yesterday (March 3, 2022) corn futures traded higher than last year’s rather amazing high and within striking range of the all-time high futures trade of August 2012 ($8.49).
Unusual situations create unusual opportunities -- and often unusual problems.
The current futures price obviously presents a great opportunity to lock in the futures portion of your cash corn (and wheat) price. But the futures price is only half of the cash price equation; the other half is basis.
Back in September, I wrote about the two types of grain sellers: cash price sellers versus basis and futures sellers. Because most farmers are cash price sellers, the basis weakens when futures go higher and basis firms when futures lower. The cash price is determined by basis and futures.
To maximize income, one needs to price the basis near the top of its annual range and price the futures near the top of its annual price range. Because basis and futures usually move in opposite directions, each needs to be priced on a different day to maximize the cash price.
Three weeks ago, an Indiana ethanol plant was paying $6.65 for corn when the futures price was at $6.50. Cash price minus futures = +15 cent basis. Yesterday afternoon, the same ethanol plant was paying $7.13 for corn with the futures price was at $7.48. Cash price minus futures price = -35 cent basis. The futures price gained 98 cents in three weeks, but the cash price gained only 48 cents! The basis weakened by 50 cents!
What it means for you
If a farmer priced his cash corn at the top of the basis market for the past month, his cash price would have been $6.65. If he priced his cash corn at the top of the futures market for the past month, his cash price would have been $7.13. However, if he priced the basis at the top and locked in the futures price near the top for the past 30 days, his cash price would be $7.63!
What does it cost to separate the day he locks in the basis from the day he locks in the futures? Zip zero -- as in free. All you need to do is track the basis separate from the futures price. Track both every week so you can recognize a great opportunity when it presents itself.
Do not be a cash price seller; be a basis and a futures price seller. And no, you do not need a futures trading account to be a futures price seller. That is what HTA contracts are for.
No one associated with Wright on the Market is a cash grain broker nor a futures market broker. All information presented is researched and believed to be true and correct, but nothing is 100% in this business.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
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