NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665
December 2, 1999
George Flaskerud, Extension Crops Economist
NDSU Extension Service
A knowledge of the basis for durum, as for other crops, is important for effective marketing. It can enable a farmer to make more profitable cash sales and to make better use of other marketing tools. The basis can also be used along with the futures market to make farm-level price projections.
Basis is the relationship between the local cash price and a futures contract price for a commodity. It is calculated as the cash price minus the futures price. In North Dakota, the basis is usually negative for durum and most other commodities, so it is described as being a number of cents under a particular futures contract price. If it is positive, it is described as being over the futures contract price.
The nearby basis is derived by subtracting the nearby futures contract price from corresponding local cash prices. For this calculation, prices from the nearby futures contract month are used until the last Thursday in the month before the futures contract month. After that Thursday, prices from the following futures contract month are used. Futures prices during the futures contract delivery month are not used since distortions between the futures and cash markets during that month can occur and work to the disadvantage of the hedger.
Here's an example: Suppose that the nearby basis is being calculated for durum beginning in August. The September futures price is subtracted from the local cash price until the last Thursday in August. After that, the December futures price is subtracted from the local cash price until the last Thursday in November and so on.
The durum basis was derived for Minot. The basis estimates were computed using weekly (Thursday or nearest day) Minot cash prices and Minneapolis durum futures closing prices, dating back to the inception of the Minneapolis durum futures contract in February 1998. Cash prices were obtained for milling and terminal quality durum.
Two years of data are now available for select months to provide estimates of durum basis. The basis is given in cents per bushel for several important time periods: August because of harvest, November because of its fall peak (on average) in the durum seasonal price pattern, and April because that is when durum prices are close to a seasonal high (on average).
For milling durum, the April basis was minus 87 cents in 1998 and minus 69 cents in 1999, the August basis was minus 83 cents in 1998 and minus $1.13 in 1999, and the November basis was minus 94 cents in 1998 and minus $1.02 in 1999. The milling basis averaged minus 81 cents in 1998 and minus 94 cents in 1999 through November.
For terminal durum, the April basis was minus $1.23 in 1998 and minus 93 cents in 1999, the August basis was minus $1.04 in 1998 and minus $1.33 in 1999, and the November basis was minus $1.14 in 1998 and minus $1.99 in 1999. The terminal basis averaged minus $1.08 in 1998 and minus $1.30 in 1999.
The best estimates for 2000 may be an average milling basis of minus 78 cents for April and minus 98 cents for both August and November. The terminal basis for April will probably not strengthen to an average level. For August and November, the best estimate for terminal durum may be the August average of minus $1.18.
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Source: George Flaskerud (701) 231-7377
Editor: Dean Hulse (701) 231-6136