“What happened? Corn futures went up 25¢ so I sold a contract. But the basis dropped 20. That stinks. Am I getting the shaft?”

That scenario is an example of how basis – the difference between a particular month’s futures contract price and the cash price – is impacted by supply and demand and/or a host of other factors.

Managing basis can help increase your cash price, and involves knowing your local basis and at other grain buyers “down the road,” says Ed Usset, University of Minnesota Extension economist.

Normally, basis narrows after harvest and into the winter, spring and summer. Prices usually increase. But storing grain to take advantage of higher prices costs a good 3-4¢/bu./month.

“Be a student of what a ‘good’ basis is in your area,” Usset says. “It takes time to develop. Also, go 30, 40 or 50 miles down the road to check regional basis. Most local elevators don’t like to hear that, but with this price volatility, you need to expand your horizon.”

Dan O’Brien, Kansas State University Extension economist,encourages being as informed as possible about historic basis trends, “not just in ‘average’ market conditions, but in some of the extreme grain market supply-demand balance situations since 2006.”

Various basis contracts are offered by major grain companies to help manage basis movement. For example, Farmers Cooperative (FC), Ames, Iowa, offers a basis contract

Basis contracts allow you to deliver grain while maintaining some pricing flexibility. They’re useful, either to capture a historically narrow basis level or move grain while awaiting an expected rally, says Jon Setterdahl, grain marketing senior VP for Farmers Cooperative, Ames, Iowa, which has some 50 branches across Iowa. “The delivery date, quantity and basis are all established in the contract.”

“Basis-later” contracts allow growers to set the futures price immediately and establish the basis at a later date. “The farmer can sell grain in deferred months and take advantage of higher futures markets,” Setterdahl says.

In late summer, north-central Iowa had an average cash corn price of about $8.10/bu. Because of tight supplies and worries of a short harvest, the basis was 3¢-over futures. At the same time, central Illinois had an average soybean cash price of about $17.70/bu. Basis was about 35¢-over.

However, corn basis levels were at 20-30¢-under for harvest-month cash bids in much of Iowa. They were about 50-55¢-under for O-N-D soybeans. And if little corn or beans are stored for 2013 delivery, a filled pipeline at harvest could easily widen the basis even more. Growers may have been wise to lock in their basis early when they cash forward contracted or sold futures contracts on their corn and beans.

Basis goes back to supply and demand. And, today'sstrong basis levels are not being reflected in some elevators contracting for delivery next year, Usset says. For example, as of early September, some Minnesota elevators were showing a basis of 25-35¢ under basis on the July corn futures contract, which was trading at about $7.80. He doesn’t recommend locking in that basis too early.

 “We’ve been over (in July basis) the last few years,” he says. “I think we’re going to be over again. It makes no sense to lock in 50¢-under for July delivery.”

Some growers feel that when grain handlers suddenly widen the basis, they’re being unfair. But, again, there’s a lot that can impact what an elevator sets as a basis.

“Each participant in a local grain market is doing their best to make a profit,” O’Brien says. “If producers find themselves in an area of lower relative grain bids, it’s possible they’re located too far from either unit-train loading facilities, ethanol plants, soybean or wet corn processors and/or livestock feeders.

“There may be a lack of competitive pressure to narrow-up their local basis bids relative to other areas, at least during times when grain supplies are relatively abundant.”

            Usset adds, “The short term impact of sharp rally in futures will be a decline in the basis. It means buyers are having an easier time of getting grain. Farmers see a rally in the board and sell, lowering the basis. It’s a supply and demand thing.”