Geography and time affect your market price.

In grain marketing, basis is the economics of when and where. On any given day, basis is the amount by which the local cash price for a commodity is above or below that day's quoted price for a particular futures delivery month-usually the nearest futures delivery month.

"Basis essentially is time and place utility," said Roger Caffrey, MFA director of grain marketing. "Basis depends on the distance [transportation cost usually is the biggest element in basis], supply and the market. It's a composite figure and can vary widely."

Shipping distance (and cost) to market makes up a major part of basis. Soybean basis at LaPlata, Mo., was 33 cents back (below the Chicago futures price) on a given day in May. On that same date, soybean basis at Brunswick, Mo., was only 3 cents back. A big part of the difference lies in the fact that Brunswick has access to a Missouri River barge terminal.

Basis also is affected by timing, and by supply relative to demand. For example, let's say that, on April 30, your local cash price for corn is $2.74 per bushel. The May futures price for that date is $2.96. Your basis for April 30 is "22 cents back," or $2.96 minus $2.74. Then, on May 3 (or thereabouts), the May futures contract closes and July becomes the nearest corn futures delivery month. Shortly after May 1, new corn export contracts boost demand and fuel prices drop, lowering transportation costs. Your local price rises to $2.82 per bushel, but the July futures price rises to $3.08 per bushel. Although your local corn price is eight cents per bushel higher, the basis has widened to 26 cents: $3.08 minus $2.82.

"Changing basis usually is expressed as 'widening' or 'narrowing,' but those terms do not take into account the fact that basis sometimes is positive, or above the Chicago price," said Caffrey. "I prefer the terms 'weaker' and 'stronger,' rather than 'wider' and 'narrower,' to more accurately describe what's happening."

In early March, the soybean basis at the Laddonia MFA Agri Services was positive. That is, the local cash price was higher than the July soybean futures.

"Right now, July soybeans are $9.45 per bushel, but we're paying $9.50 per bushel, or 5 cents over, and we have been as high as 20 cents over," said Don Houston, general manager of MFA Agri Services at Laddonia, Vandalia and Martinsburg. "Soybean prices are steadily getting higher. In this market, I'd recommend that a farmer lock in the positive basis on beans he has in commercial or on-farm storage. While a basis contract will make a few cents more on old-crop soybeans, I wouldn't contract basis on the new crop."

For producers with old-crop soybeans on hand, Houston recommends a basis contract in which he'll pay 80 percent of the current price, take delivery on the beans, then pay the rest when the producer sells the soybeans.

"MFA takes title to the soybeans at the time they are delivered, so the grower has no further storage costs," Houston said. "However, he does retain the opportunity to gain from any future price increases."

On the other hand, the grower risks any downturn in prices, although he has the basis locked in. But the 80 percent advance does not provide price-line protection. If prices should slide below the 80 percent original payment, the producer must pay back the difference.

"There are historic ranges of basis at a given location, but determining what's good and what's bad can be complicated," said Caffrey. "There's usually a definite reason for basis swings away from traditional ranges. But you need to plot the basis over a period of time to determine long-term and seasonal trends.

"Basis generally works better for people who are trading a lot of grain, but farmers can use basis contracting successfully when they've done their homework. Without a working knowledge of basis history and of the current supply and demand factors affecting the market, it's not likely that the best basis will be captured when grain is sold.

"There is no price protection with a basis contract," Caffrey continued. "A popular practice is to sell grain on a basis contract and delay pricing the commodity until later. This puts you at risk of owning a basis contract into a declining market."

The development of new markets in a region typically strengthens the basis for crop producers in that area. Northeast Missouri Grain LLC (NEMO Grain), the new-generation ethanol cooperative at Macon, Mo., is an example. Last year, NEMO Grain completed an expansion that brought annual ethanol output to about 40 million gallons. That's a market for 16 million bushels of corn in the nine or 10 counties around Macon.

"A study we commissioned in 2001 found that NEMO Grain has had a 19 to 21 cents per bushel positive impact on the 27.8 million bushels of corn produced in the cooperative's trade area," said Fred Stemme, marketing director, Missouri Corn Growers Association. "Since that study was completed, NEMO Grain has doubled their capacity."

"Since March, 2003, basis here has been essentially level with the Chicago price," said Matt Gerhold, NEMO Grain. "We're averaging 4 cents per bushel over the Mississippi River terminal at Hannibal. When you consider lower transportation costs, we're paying 25 to 32 cents per bushel better than the Hannibal river price. The average spread is 27 cents per bushel since March, 2003.

"We'll write basis contracts if a producer wants to do that, but with basis essentially neutral, it's not very profitable right now," Gerhold added.

"Basis trading involves the same kind of risks-up or down-as the grain market," said Don Houston. "If you study the lessons, a basis contract can be profitable. But we're talking about small increments in value here. Basis is not a way to get rich quick."