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| Having been a student of the grain basis for a long time, as up until the mid-sixties hedgers (basis traders) were very rare at the country origination level due to the fact grain elevators generated the bulk of their income from government grain storage & there was little interest to consider other alternatives, historical data reflected the giant grain firms generated more gross income from capturing swings in the basis than did the producer actually producing the product. I made a point in the grain business to always reserve sufficient space for company owned grain, sacrificing some government storage income, in order to participate as a basis trader. In order to make efficient use of available operating storage, interest costs & etc. the typical pattern for corn purchased in harvest was to liquidate the position during the first week of December, again buying producer grain in January & liquidate that grain in March & be a flat price trader until grain began to once again be offered by the producer in June.
Price later programs were more widespread in the mid-to late 70's & because this removed the need to compete for grain the basis pattern began to change. Now, in view of the widespread use of a variety of pricing programs & higher transport costs the basis patterns again widened.
My point. In markets of extreme price levels, the basis reflects legitimate higher costs and risk. However, because of the widespread use of these programs the 'need to compete' for local originated grain has lessened...increasing profits for the grain industry in trading the basis. The producer absent self-owned grain storage transfers this potential profit to the dealer. As a futures trader & looking at these wide price swings it is easy to say 'why own the grain at all' once it is harvested. Second point being, if a producer gives up a share of the basis he/she is then a pure speculator in price without the cushion of basis gain. History proves grain storage does pay for itself, maybe not every season, but it does in the long term. The CBOT aggressively turned to options trading in the 1984-1986 as the coming train wreck was somewhat obvious & producers were increasingly tight on operating capital & sick of the margin calls in trading futures. Option income for dealers writing calls and puts is occasionally huge. The dealers know producers will seldom use the deep in the money options, preferring the cheap route & those instruments generally expire worthless. Once in awhile, someone will get lucky and use a cheap put or call with astounding results, but in general, any trend, making the producer a paper trader, giving up his/her potential gain on the actual inventory removes a potential income stream. Option trading requires a more sophisticated strategy. The bottom line, the producer going by the 'book' with self-owned storage and using futures as his/her hedge strategy & a base of knowledge in regard to carrying charges & placing the hedges in the correct future..& with a knowledgeable lender..will generally enjoy a higher income stream.
Edited by SeniorCitizen 2/19/2008 05:28
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Interesting Speaker the other day
