A local elevator offers to buy corn at 25 cents under the March futures price for a future sale, with free pickup. The 25-cent figure most likely represents what?

A local elevator offers to buy corn at 25 cents under the March futures price for a future sale, with free pickup. The 25-cent figure most likely represents what?

• A. The expected future March corn basis
• B. The premium for delivery in March
• C. The current local cash price
• D. The expected storage cost

Answer: (A)

Understanding basis is the key here. Basis is the difference between the local cash price you can get today and the futures price for a future delivery. When an elevator says it will buy corn at 25 cents under the March futures price, that 25-cent figure is the basis for March corn. It means the cash price you’d receive now would be the March futures price minus 0.25. For example, if the March futures price is 6.00 per bushel, the local cash price offered would be about 5.75 per bushel (6.00 − 0.25). The negative 25-cent basis reflects local conditions like demand, transportation costs, storage expectations, and risk, which can cause cash and futures prices to diverge. The statement isn’t describing a premium (which would be above futures) or just the cash price by itself, and storage costs are factors that influence the basis rather than being the basis itself.

Understanding basis is the key here. Basis is the difference between the local cash price you can get today and the futures price for a future delivery. When an elevator says it will buy corn at 25 cents under the March futures price, that 25-cent figure is the basis for March corn. It means the cash price you’d receive now would be the March futures price minus 0.25.

For example, if the March futures price is 6.00 per bushel, the local cash price offered would be about 5.75 per bushel (6.00 − 0.25). The negative 25-cent basis reflects local conditions like demand, transportation costs, storage expectations, and risk, which can cause cash and futures prices to diverge.

The statement isn’t describing a premium (which would be above futures) or just the cash price by itself, and storage costs are factors that influence the basis rather than being the basis itself.