Post-Harvest Market Signals, Basis and Carrying Charges

Post-Harvest Market Signals, Basis and Carrying Charges

Dec. 2, 2013

Once the combines have finished their work, it is time to implement post-harvest marketing plans. Cash prices are important to watch, but other factors — particularly basis and carrying charges — can provide market insight for sell or store decisions.

Basis

Basis is the difference between the local cash price and the nearby futures contract. It is a measure of the transportation costs associated with moving a commodity from the local elevator to a specified delivery point. However, it is also impacted by local demand, availability of storage, and interest rates.

Basis is usually described as “stronger” or “weaker.” A stronger basis means there is a smaller difference between the local cash market price and the futures market price. A stronger basis implies that local grain elevators are seeking the commodity and are willing to pay more for the product now, rather than later. Conversely, a weaker basis signals to grain producers that local demand is low and to consider holding the commodity for a future date.

Carrying Charges

A “carrying charge” is the difference between current futures contracts, a future contract month and a near-term contract month. Carrying charges represent a local elevator’s estimate of costs associated with storage and conditioning, but are influenced by local demand, transportation, and interest rates. For example:

Assume that on Nov. 20, the closing price of the December 2013 corn contract was $4.17 per bushel, and the closing for the March 2014 corn contract was $4.25 per bushel. The carrying charge from December to March was $0.08 per bushel:

Dec 2013 Contract Futures Price — $4.17

March 2014 Contract Futures Price — $4.25

$4.25 - $4.17 = $0.08 or an 8¢ estimate of storage and conditioning costs

The market is willing to offer the producer 8¢ per bushel to store the crop until a later date.

If the carrying charge is negative, the future contract price is lower than the near-term price. This is an indication that the commodity is in demand locally and should not be stored. If the carrying charge is positive, the future contract price is higher than the near-term contract. This indicates that the commodity is not in demand locally, and if the carrying charge is large enough to cover the producer’s costs of storage, the market is telling the seller to hold that commodity until that future month.

The cost of storage is different for each producer and should be calculated individually. Table 1 uses the Nov. 20 closing prices, a 4.5% interest rate, and a $0.04 per bushel monthly storage charge to illustrate the potential cost of storage into future months.


Table 1. Carrying charges and storage costs for corn and winter wheat as of Nov. 20, 2013.

Closing
Prices
11/20/2013
Corn
Wheat
Price
Carry
Storage
Cost*
Price
Carry
Storage
Cost*

Dec
$4.17
   
$6.95
   
March
$4.25
0.08
0.22
$6.97
0.02
0.26
May
$4.33
0.16
0.33
$6.97
0.02
0.40
July
$4.40
0.23
0.45
$6.89
–0.07
0.53

* Storage costs are different for each producer, visit http://go.unl.edu/pagecon to download a spreadsheet to calculate your storage costs.     

It is important to track carry-cost charges on a daily basis as demand may swing future prices from a positive (in-the-money) position to a negative (out-of-the-money) position. It is also important to accurately estimate the cost of grain conditioning. During storage, grain condition won't improve and can decline.

The largest gamble with stored grain is an expectation of future demand and the movement of future month-contracts relative to the current contract. Carry-costs on stored grain have the capacity to move negative in one day, then swing positive the next. Carefully consider the grain outlook and local demand when making decisions regarding grain storage.

Making Grain Marketing Decisions

Basis and carrying can be evaluated together to make marketing decisions.

If the basis is weak and the carrying charge is large or above storage costs, current market demand for the commodity is low. This is an indication to store the grain to be marketed at a later date.

If the market carry is low or negative and the basis is strong, current market demand is high. This is an indication that the market is willing to pay for commodity delivery now, rather than later.

In western Nebraska, for example, corn basis has ranged from –0.06 to –0.09 under in November, well above the five-year average for November of –0.32. The table shows that even though the carry is positive, it is not larger than the example storage costs.

Wheat basis has ranged from –0.37 to –0.31 in November, above the five-year November average of –0.96. The carrying charge is not large enough to cover the example storage cost and even becomes negative in July.

With a strong basis and low or negative carrying charges, the market is signaling that there is demand for a commodity to be sold now, rather than stored to a future market date. Just as prices change on a daily basis, so do basis and carrying charge. Watching the markets and evaluating these market signals can help producers make sound marketing decisions for their operations.

Jessica Johnson, Tim Lemmons, and Allan Vyhnalek
Extension Educators