Farm406

11 farm406 farm finance By Anton Bekkerman NEW TOOLS FOR ACCESSING HISTORICAL MONTANA WHEAT BASIS What information does www.montana.edu/ basis provide? The online tool provides over ten years of historical local price, basis (both nearby and harvest), and hard red winter wheat and hard red winter spring wheat futures contract prices. Local prices and basis represent six Montana regions (Billings, Golden Triangle, Great Falls, North Central, Northeast, and Southeast). All information is updated daily. Visitors can view data using the integrated graphing functionality or download as much or as little of the data for personal use. What is basis and why is historical basis a useful indicator of market? Basis is defined as the difference between a cash price offered for a commodity at a specific location and a futures contract price for that commodity: Basis = (Local Spot Price – Futures Price) This difference occurs because futures markets, which capture global conditions and expectations, do not fully reflect the conditions in any particular local market. These discrepancies may be due to local variability in a commodity's quality level, local demand and supply, and transportation modes, among numerous other factors. If none of these factors affected prices in a local market, then the basis would be zero, because the local price would be the same as the futures price. Because basis is a combination of local and futures market information, it is a much more stable indicator of relative market conditions than the local spot or futures contract price alone. For example, while spot or futures prices may change drastically between years (or even days), basis is subject to much smaller movements. As such, basis can be a better indicator of how favorable or unfavorable current markets are relative to historical average. What can I learn from examining basis levels and historical trends of basis? Basis levels are most useful when they are used to examine current market conditions relative to historical marketing conditions. If current basis is stronger (less negative; more positive) than a historical basis level, current markets are more favorable for selling grain and less favorable for procuring grain. Conversely, weaker basis (more negative; less positive) is suggestive of more favorable conditions for buyers and less favorable conditions for sellers. I've seen other online tools that provide historical wheat basis in other states. Why can't I simply use that information for Montana? Basis is a highly specific measure for a particular crop, particular quality level (for wheat, this is typically protein content), particular location, and particular time period. Using basis information that does not specifically describe the details of your particular market and crop can lead to incorrect marketing insights. What is "nearby basis" and "harvest period basis," and why do they provide different market information? Basis can be calculated using prices of futures contracts that expire at different time periods. The most commonly reported basis value is the "nearby basis," which is calculated as: Nearby Basis = (Local Spot Price – Nearby Futures Price) The nearby futures price refers to the price of the futures contract that is closest to its expiration month. For example, in the Kansas City (KCBT) hard red winter wheat futures market, there is no futures contract that expires in January. The closest (or nearby) contract is the March futures, which expires in March. Therefore, the nearby basis may be a more informational tool for understanding current marketing conditions. Recently, my colleague Kate Fuller and I developed a new online tool that's intended to assist wheat producers in accessing price and basis information that can help make more informed marketing decisions. To better introduce our readers to this tool, Kate and I have put together the following information to help introduce the economic concepts and insights that historical price and basis information can provide.

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