By: Brian Wiggins, Vice President of Business Development, Wellington Commodities
Corn is at five bucks.
You’ve either heard that type of statement before or said it yourself. Then, you call the buyer, ask for a bid, and maybe hear something considerably lower. Immediately you may wonder, “If corn is $5.00, why am I being bid $4.60?” It’s certainly a fair question, and understanding the answer is one of the most important building blocks in grain marketing.
The reality is that the futures market and your cash bid are not the same thing. In fact, the futures market is only one component of the price you ultimately receive. To understand where your bid comes from, you need to understand the relationship between futures and basis.
The Formula Every Farmer Should Know
In its simplest form, every cash grain price is built from two pieces.
Simply put:
Cash price = Futures Price +/- Basis
Most farmers can tell you where corn futures are trading. Far fewer can tell you what basis is doing locally. The funny thing is, both are affecting the check you’ll eventually cash.
What Are Grain Futures Prices?
Think of futures as thousands of buyers and sellers arguing about what they think grain is worth right now.
Every day, traders around the world react to new information that may include:
- Weather concerns
- Yield expectations
- Export demand
- Government reports
- Global currency movements
- Economic conditions
- Geopolitical events
As each of these factors changes, futures prices adjust to reflect the market’s perception of how it affects value. A drought threat develops in a major growing region? Futures might rally. A larger than expected crop estimate in a government report? Futures may decline.
But here’s the key point and where a lot of farmers get tripped up:
The futures market doesn’t know what’s happening with your local buyers.
For example, it doesn’t know if the ethanol plant down the road needs grain right now or if storage at your local elevator is full. It doesn’t know if local demand is unusually strong or weak. That’s where basis comes in.
What is Basis in Grain Marketing?
If futures tell the global story, basis tells the local story. Basis is simply the difference between the local cash bid and the relevant futures price.
For example, if the buyer quoted you $4.60 for fall delivered corn but December corn futures are $5.00, the basis is:
$4.60 - $5.00 = -$.40
In this case, basis is 40 cents under futures, often expressed at “-40” or spoken as “40 under”.
Suppose another location twenty miles away is bidding $4.80. That location has -20 basis.
Ever wonder why one buyer is 20 cents better than another on the same day? Most of the time, basis is helping tell that story.
Some factors impacting basis include:
- Local supply and demand balance
- Transportation costs
- Storage availability
- Competition among buyers
- Processor demand
- Export activity
- River, rail and freight conditions
I’ve had conversations with farmers who were waiting for futures to rally while basis had quietly improved 20 cents. They were watching the board every day but weren’t paying much attention to what local demand was doing.
Here's another way to think about basis:
Imagine futures as the song playing through a speaker. Everyone hears the same song because everyone is looking at the same futures market.
Basis is the volume knob.
Local buyers can effectively turn that volume up or down depending on their demand for grain. If an ethanol plant needs corn or a processor is short supplies, they may bid more aggressively, strengthening basis. If grain is plentiful and buyers have adequate inventory, basis may weaken.
The song didn't change. The volume did.
In the same way, futures may remain unchanged while basis moves significantly, resulting in a very different cash bid.
How Basis Creates Marketing Opportunities
When people think about improving grain prices, their first thought is usually, “I need the board to rally.” It’s certainly one way to improve a bid, but consider the following example:
Suppose corn futures are trading at $5.00.
- At location A, basis is -40, creating a cash price of $4.60.
- At location B, basis is -10, creating a cash price of $4.90.
- The futures market is identical in both situations. The difference is entirely basis.
Now consider another scenario:
Futures stay $5.00, but the basis strengthens from -40 to -15. The cash bid rises 25 cents, allowing the farmer to gain 25 cents per bushel without any futures rally.
This illustrates an important lesson. That’s the point many farmers miss. Not every marketing opportunity comes from a futures rally. In many cases, improvements in basis can create meaningful opportunities to increase revenue.
Looking at Marketing a Little Differently
A lot of marketing conversations eventually boil down to one question:
“Should I sell?”
The problem is that answer depends on what’s making the bid attractive in the first place. A better question might be:
“What part of this bid do I like, and what part don’t I like?”
You might like the futures price, but think basis has room to improve. You might dislike futures, but see an unusually strong basis bid that deserves consideration.
When you start viewing futures and basis as separate components, marketing decisions often become clearer.
Instead of asking one big question, you’re asking several smaller questions:
- Is futures value attractive?
- Is basis attractive?
- How does today’s bid compare to normal for this time of year?
- Is local demand stronger than usual?
- Are there opportunities elsewhere?
This approach can lead to better decision-making because you’re evaluating what is actually driving the bid.
Seasonal Grain Marketing Patterns
Markets are rarely static. Both futures and basis tend to follow seasonal tendencies, but they often do so for different reasons.
Let's start with basis.
At harvest, grain is abundant. Elevators are receiving deliveries, storage fills up quickly, and transportation systems become busy. Because supplies are readily available, basis often tends to be weaker.
As the marketing year progresses, grain becomes harder to source. Some bushels have been sold, others are locked away in storage, and buyers may need to become more aggressive to encourage movement. As a result, basis often strengthens over time.
Futures, on the other hand, are often influenced by uncertainty.
Early in the growing season, there are a lot of unanswered questions. Will the crop get planted on time? What will weather look like? Will yields be average, above average, or below average?
The market doesn't know those answers yet, and markets generally don't like uncertainty. Because of that, futures prices often build in some level of risk premium. That's one reason weather forecasts in June and July can sometimes move the market so dramatically.
As the season progresses, many of those unknowns begin to disappear. If weather cooperates and crop prospects improve, some of that risk premium may come out of the market. If drought develops or production appears threatened, futures may move higher as the market reacts to those risks.
The point isn't that futures and basis always follow a script. They don't. There are exceptions every year.
Still, understanding seasonal tendencies can provide valuable context. When farmers know what is typical for a given time of year, they're often better positioned to judge whether a current bid is relatively strong, relatively weak, or worth a closer look.
When evaluating a grain bid, ask yourself: Is the opportunity coming from futures, basis or both?
The Bottom Line
The futures market tends to get most of the attention, and understandably so. But the futures market alone doesn’t determine what goes into your bank account. Your cash price is the result of futures and basis working together. Futures tell us what the market thinks grain is worth. Basis tells us what your local market is willing to pay.
Understanding how a bid is built is an important first step. The bigger challenge is deciding what to do with that information when opportunities present themselves. Markets rarely offer perfect answers, which is why having a marketing plan and evaluating opportunities consistently can be just as important as understanding the market itself.
The goal isn’t to predict every market move correctly. Nobody does that. The goal is to understand how prices are built so you can recognize opportunities when they show up.
At the end of the day, the market might be $5.00.
But the board isn’t your check.
Key Takeaways
- Cash price equals futures price plus or minus basis.
- Futures reflect global market forces.
- Basis reflects local market conditions.
- Basis changes can create marketing opportunities even when futures are flat.
- Understanding both components helps improve grain marketing decisions.
Frequently Asked Questions About Futures and Basis
What is basis in grain marketing?
Basis is the difference between the local cash grain bid and the corresponding futures price. It reflects local market conditions such as supply and demand, transportation costs, storage availability, buyer competition and processor demand.
How is a cash grain price calculated?
A cash grain price is calculated using two components:
Cash Price = Futures Price ± Basis
For example, if corn futures are $5.00 per bushel and the local basis is -$0.40, the cash price would be $4.60 per bushel.
Why is my grain bid lower than the futures market price?
Your grain bid may be lower than the futures market price because local buyers apply a basis adjustment to account for local market conditions. Factors such as transportation costs, available storage, local grain supplies and buyer demand can result in a basis that is "under" the futures market, reducing the cash bid.
Can basis improve even when futures don't?
Yes. Basis and futures can move independently. If futures remain unchanged but basis strengthens, your cash grain price can still increase. For example, if futures stay at $5.00 and basis improves from -$0.40 to -$0.15, the cash bid increases by $0.25 per bushel without any futures rally.
When does basis typically strengthen?
Basis often tends to strengthen after harvest and throughout the marketing year. As grain supplies become less readily available and buyers need to encourage grain movement, they may bid more aggressively. However, basis can vary based on local supply and demand conditions, transportation logistics and buyer needs.
