Wheat futures rise 15 cents a bushel. Does that mean the local cash bid will be 15 cents higher?
Not necessarily.
Futures contracts are actively traded standardized agreements. They are an arrangement to buy or sell a specific quantity and quality of grain at a set price. Delivery takes place at a future date. Because the details are clear, futures markets form a useful price benchmark.
WHY IT MATTERS: Following futures alone gives producers only part of the picture. Track the basis, compare nearby cash bids and check delivery terms. A change in the basis can create, improve, or undermine a selling opportunity even when futures appear quiet.
However, the futures price is only part of the price a farmer receives.
The other part is the basis. That’s the difference between the local cash price and the futures price.
As a result, a 15-cent gain in futures does not automatically mean a 15-cent gain in the cash bid. If basis weakens, the cash bid may rise by less than 15 cents. If basis strengthens, it may rise by more.
That is why farmers need to watch both futures and the basis to make informed marketing decisions.
How the basis affects the cash price
The basis is the difference between a specified futures contract and a local cash bid. It incorporates local supplies, competition among buyers, transportation costs and delivery timing.
Simply put, the futures price adjusted for the basis equals the cash price.
Suppose wheat futures gain 15 cents, but the basis weakens by 10 cents. The cash price only went up five cents. The weakness in the basis has offset most of the rise in futures. If the basis strengthens instead, the cash bid may improve by more than the futures market alone suggests.
The differences can be substantial. For example, The Western Producer has, at times, reported wide regional variations in Canadian spring wheat bids. At other times, a review of western Canadian wheat prices has shown that the direction of local bids need not match the direction of futures. These are examples, but the message is clear: the basis can have a huge impact on your prices.
The basis also changes with the delivery period, reflecting factors such as storage costs, transportation availability, processor demand and buyers’ need for grain at a specific time. A bid for grain delivered next week may not offer the same opportunity as one for delivery several months later.
From my experience
One lesson from years of watching agricultural markets is that the futures price can become a distraction. A farmer can correctly anticipate a futures rally and still be disappointed with the eventual cash price. Conversely, a favourable basis can create an attractive opportunity even when futures seem unappealing.
The price that matters most is not the one flashing on a futures screen. It is the price you can actually capture, under terms that work for your farm.
This article is part of a series from The Western Producer and Farmtario Markets Desks exploring the forces that move agricultural markets and influence the decisions that shape farm marketing.
