- Deliver grain while maintaining some pricing flexibility.
- Capture a historically narrow basis level.
- Or, move grain while awaiting an expected CBOT rally.
- Delivery date, quantity, and basis* established by the contract.
*Basis price level expressed in cents per bushel above or below the CBOT futures for a specified futures month. A final price is set by fixing the CBOT level during CBOT trading hours.
Basis contracts must be priced before the CBOT delivery month. A basis contract may be rolled ahead to offer more pricing flexibility. In that case, basis will be amended by the spread between the two futures months, and a small service charge will be assessed.
Plus factors:
- Risk of basis downside eliminated.
- Opportunity to take advantage of future CBOT rallies.
- May avoid weak harvest basis or low flat price.
- 70% advance on contract value possible after delivery.
- Buyer assumes quality liability.
- Eliminate storage or price later charges.
Potential drawbacks:
- Future basis improvements cannot be realized.
- You remain subject to risks of CBOT fluctuations.
- Requires knowledge of local historical basis.
- 5,000 bushel increment in the contract.
- If the market drops sharply, it may be subject to a margin call if you take and advance.