Basis keeps Chicago’s good news in the parking lot
STORM LAKE, Iowa — A rally in corn futures reached a local grain elevator Tuesday morning and was asked to wait outside while the manager finished posting a cash bid that would keep the excitement from spreading.
The rally had arrived by radio in a farmer’s pickup. By the time the truck crossed the scale, the farmer had mentally paid a fertilizer bill and authorized a new starter for the auger. When he saw the local bid, he decided the auger could continue starting through prayer and a tap with a hammer.
“Chicago says corn’s up,” he told the scale attendant.
“It is,” she said. “You’re in Iowa.”
Corn Basis Explained: A Price With Travel Expenses
The elevator manager explained that the local cash bid reflected the futures price plus or minus a local adjustment called basis. Freight, storage and demand all play a part. With trucks lined up and space tight, the elevator had room to admire the rally through the window. A primer from the University of Minnesota’s AgRisk library, Corn and Soybean Price Basis, walks through how the number is built.
The bid board outside the scale house showed the day’s numbers in white letters. The futures line, copied from the radio, ran several cents above the cash bid posted beneath it. The gap had a number, and the number had a minus sign, and a farmer waiting in line pointed out that the minus sign was the only part of the board that hadn’t moved all morning.
The farmer understood basis. He’d been selling corn long enough to know the difference between the price on the radio and the price available to a man who had already driven twenty miles with a full trailer. He wanted the manager to appreciate that one of those numbers had accompanied him all the way into town and was expecting to meet the other.
A farm marketing educator at the county extension office said basis is one of the few parts of the market a producer can actually study. “Keep a weekly record,” she said. “Cash price, nearby futures, the difference. After a couple of years you know whether the elevator is being generous or just being an elevator.”
In line behind him, another grower called an ethanol plant to compare bids. The plant offered more per bushel. By the time she figured the extra mileage, the wait and getting back to the field before dark, the advantage would buy supper if nobody ordered a drink.
The trucker next in line said he could haul her corn there tomorrow. He quoted his rate. She called the elevator back.
The ethanol plant’s receiving manager, reached by phone, said the plant’s bid reflects its own demand and its own freight. He said he understood why a grower might compare, and that he did the same thing at the grocery store.
USDA Grain Bid Reports: Chicago Remains Upbeat
USDA’s grain market reports track bids in different locations, giving growers something to compare against their local price. The Agricultural Marketing Service publishes daily grain bid reports through its Market News program. The useful question is what the grower nets after delivery and other costs, a detail the morning radio host rarely has time to cover before handing off to the weather.
A transcript of the radio segment the farmer had been listening to runs forty seconds. The host reads the corn futures settlement, calls it “a strong move,” and says that producers across the Midwest “should be pleased.” The next line is a promotion for a truck dealership. The segment does not mention freight.
By noon, the farmer had decided to sell enough corn to cover an upcoming bill and store what he had room for. The elevator manager said that sounded reasonable. He had bills coming due too, plus a line of trucks and a conveyor making a sound he preferred to describe as seasonal.
As the farmer pulled off the scale, the radio announced that corn had extended its gains.
He turned it up so the trailer could hear. The trailer was empty by then, but after a morning of listening to market commentary, the farmer thought at least one member of the operation ought to leave town feeling bullish.
Five Humorous Observations
- Chicago says corn is up. Iowa says wait outside. That’s the only relationship where the guy in the city gets the good news and the guy with the corn gets the invoice.
- He drove twenty miles with a full trailer to find out the price on the radio and the price in front of him are two different guys. It’s like ordering the steak off the billboard.
- The farmer started the auger through prayer and a hammer. That’s the original voice-activated technology.
- The radio host reads the corn price and then a truck commercial. Of course. They know who’s buying the trucks.
- He turned up the radio so the empty trailer could hear the good news. Finally, somebody who’s equally unaffected by it.