Basis Fix

This type of contract is a mirror image of the fixed futures contract. Instead of locking in a futures price first, the producer locks in the basis first. Because the elevators typically don't offer basis for new crop until early summer, the producer would have to remain unpriced on his harvest sales until that time. The producer studies his seasonal basis chart and sees that, on the average, basis tends to improve into early summer. He decides to lock in his basis as soon as possible in order to avoid potential harvest pressure later in the summer.

On June 1, he sets the basis with his elevator at $.58 over the Minneapolis December 2000 futures contract (Portland basis). He has until November 15 to lock in the futures price and complete the cash sale. During the summer, he observes that futures market volatility increases, as weather becomes a dominant player in price behavior. He decides to wait to see if a weather problem arises during the summer that could send futures dramatically higher. However, on June 30, key chart support is broken and he decides not stay exposed to the futures market any longer and sets the futures price with his elevator at $3.41.

Taking the futures price of $3.41 and adding the basis of $.58, gives him a net cash price of $3.91.

Basis contract have gained in popularity recently, particularly as prices have declined and producers look to alternative methods of marketing that leave them some flexibility to enhance cash price. However, it is very important to recognize the risks involved with the basis contract. After the basis is locked, the only thing that can improve his net cash price is the futures market, which is by far the most volatile component of the cash price. Basis contracts may not be the appropriate choice if a producer is not comfortable being involved with futures markets.