Basis Contract

Preserving a Basis Level With a Basis Contract

If you want to preserve what you believe is an attractive basis level while waiting for changes in the futures price, a Basis Contract may be a valuable marketing option for you.

What is it?  A Basis Contract allows you to identify a basis level before specifying the futures price.  You agree to deliver a specific quantity and quality of a commodity for either spot of future delivery at a predetermined value over or under a specific futures option price.  The final cash price is determined when you select or lock in the futures price.  This contract is called an Unpriced or Basis Fix contract.

What are the advantages of a Basis Contract?

  You may benefit from improved futures levels.

  You may amend or roll this contract to capitalize on market inverses and delay final pricing.

  You may generate cash through an advance upon delivery feature that typically provides 70-80% of the contract value.

  It may be a lower-cost option than paying storage and interest.

What are the risks and disadvantages of a Basis Contract?

  You cannot benefit from further improvements in the basis level.

  You remain subject to the risk of changes in future price levels.

  You may be unable to capture a narrowing basis at the same time that the futures level is dropping.

  If you amend the contract during a market carry, the spreads will have moved against you, resulting in a lower-than expected market price.

  If the cash value of the contract falls below the level of any cash advance you have received, you may be requested to return a portion of the advance.

When is it used?  Sellers generally use the Basis Contract when the basis level is attractive but overall prices are unattractive because of low futures prices.  Since the basis tends to be most narrow when futures levels are low, most sellers use the Basis Contract when they are confident the futures price will go higher.

How do I amend or roll a Basis Contract?  You may amend or roll the Basis contract to a new futures hedge month.   These amendments allow you to shift forward the futures reference month on which the final pricing is based.  If the contract is amended, the final basis level will be adjusted by the difference between the original and new futures reference month at the time of the amendment.  If the new futures month is lower than the original futures month (an inverse), the basis will narrow.  If the new futures reference month is higher (a carry), the basis will widen.  The number of times you may amend the contract varies by location, consult with your local UFC representative for the number of amendments they allow.

How does it work? Let’s say your local UFC Service Center quotes a price of $2.00 per bushel for harvest-delivered corn.  At that time, December futures are $2.25 per bushel, resulting in a basis level of 25 cents under December.  You believe this is a good basis and are concerned that it may widen as harvest progresses.  You also are confident that futures may rally.  So, you write a Basis Contract with UFC for October delivery at 25 cents under the December futures.

On November 15, December corn futures have risen to $2.80 per bushel and the local cash prices to $2.50 per bushel.  The basis also has widened to 30 cents under the December futures level on your contract.

In this example, a Basis Contract would net you 5 cents more that waiting until November 15 to sell on the cash market and 55 cents more thatn you would received by selling October 1 on the cash market.

Note, however, that if the futures level had dropped below $2.25 per bushel, or if the basis had narrowed to less than 25 cents under the December futures, you would receive less for your corn that if you had sold it on October 1.

This marketing alternative overview has been prepared to help you identify the marketing alternatives offered by Ursa Farm Marketing, along with the advantages and disadvantages of each.  Ursa Farm Marketing has used its best efforts to provide you with this useful and helpful information.   However, we cannot guarantee that this contract alternative will function in the same way in each and every situation, and information which may be accurate for one farmer, may not necessarily prove to be accurate for another.  Therefore, we do not make any warranty or guarantee as to the accuracy of any of the information as it is applied in a particular marketing strategy.  Entering into any of the transactions outlined in this presentation will not result in your opening a futures account with UFM or otherwise, nor will you obtain a futures position.  The only futures position relative to any transaction, if one exists, will be held by UFC.  This and other contracts may employ the futures market as a grain pricing mechanism, but the contract described are not, themselves, futures contracts.