Basis Fixed Contract
The basis portion of this contract is determined or “fixed” at the time the contract is written. Pricing of the futures portion of the contact can be done at a later date. Payment on this contract is made upon final pricing unless the pricing precedes the shipment period.
- Allows the seller the ability to benefit if the futures market rallies before the pricing date on the contract.
- Allows the seller of grain the ability to lock in favorable basis levels if the seller feels the basis market will decline before pricing the futures portion of the contract.
- Allows the seller to deliver grain immediately while still waiting to price the futures portion of the contract at a later date.
- Eliminates storage expense inherent in inventorying grain while waiting for a price rally.
- Eliminates the risk of quality deterioration that is inherent with storing grain.
- Exposes the seller of grain to any potential decline in the futures market.
- Does not allow the seller the ability to take advantage of carry that may be available in the market.
- Payment is not received until grain is priced.
On December 1st, the posted cash bid for February delivery corn is $3.60 and the March futures level is $4.00 The basis level is 40 cents under the March futures. You like the basis level, but think that the futures market has a potential to rally. You think because of this possibility and seasonal corn movement after the first of the year will likely cause the basis to widen before you plan to deliver. You enter a Basis Fixed (Unpriced) contract with Fremar LLC and lock in the 40 cents under the March futures.
A friendly January crop report has caused March futures to rally to $4.25. Seasonal corn movement has also been brisk. On January 25th, Fremar’s basis level has widened to -50 cents under the March futures for February delivery. You have two options at this point:
1.You can lock in (Price) any amount of bushels on the basis contract at $4.25 March futures. By pricing the contract, you receive $3.85 cash price for any bushels that are on the contract. ($4.25 -.40 = $3.85).
2.You can elect not to price the bushels prior to delivery and to deliver in February. Bushels would then have to be priced by the end of February.