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  • Writer's pictureJacob Kubela

The Easiest Way To Add Premium When Selling Grain

When selling grain, it's important to understand the difference between the basis and futures prices. These two prices determine the value of your grain, and separating them can help you get the best possible deal.

The basis price is the difference between the local cash price of your grain and the futures price. The futures price is the price set by the market for delivery of a commodity at a specific time in the future. The basis price can change depending on factors like transportation costs, local supply and demand, and the quality of your grain.

So, why is it important to separate the basis and futures prices when selling your grain?

Firstly, futures and basis prices tend to be inversely related. When futures prices are going up, basis is generally widening or going down. By separating the two you can give yourself the opportunity to take advantage of futures prices when they are up, and then wait for basis to firm up before setting that price. This is particularly important in markets where the basis price can fluctuate significantly.

For example, let's say the futures price for corn is $4.50 per bushel, but the local cash price is only $4.00 per bushel due to high transportation costs and a surplus of corn in the area. If you sell your corn based on the cash price alone, you'll be giving up 50 cents per bushel. By separating the basis and futures prices, you can wait for basis to improve and then you can negotiate with the elevator or end user before setting the basis price.

Secondly, separating basis and futures prices helps you manage risk. If you use a futures account or our cash direct contracts you can set the futures price early. This allows you to shop around for the best basis in your market area, and decide when you want to haul that grain to the elevator. You are able to maintain the beneficial interest of your grain until you are absolutely ready to deliver it to the elevator.

Thirdly, this strategy is something that you can implement on your farm without the need to use a broker or a third party. If you typically haul everything to one elevator you would be able to do this 100% with that elevator using Cash Forward (HTA) contracts and setting the basis later.

There are several tools and strategies that you can use to separate basis and futures prices. One such tool is the basis contract. A basis contract allows you to lock in the basis price while leaving the futures price open. This helps if basis is at a favorable level before the futures price has increased to a level where you are comfortable setting it.

Another strategy is to use a cash forward or Hedge to Arrive (HTA) contract. Your local elevator offers this type of contract. If you do not want to lock in a delivery location at the same time you can use a futures account or a pricing tool lie our Cash Direct Contract. These contracts are used after the futures market has increase to a level that you want to lock in your futures price, but are not ready to set basis.

Finally, having a good relationship with your local merchandiser, or an advisor that can help you understand market fundamentals and the different forces that are in play at the time is very important. This will help you make informed decisions when selling your grain.

In conclusion, separating the basis and futures prices is an essential part of selling grain. By doing so, you can take advantage of the inverse relationship that futures prices and basis have with each other. The more you understand this relationship the more you can increase the price that you are able to get for your grain. Good luck out there!

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