A corn basis contract is a type of futures contract that is used to hedge the price risk associated with the sale or purchase of corn. This contract represents the difference between the price of corn in the local cash market and the price of corn in the futures market. In other words, it is a contract that locks in the difference between the current price of corn and the future price of corn.
Corn basis contracts are commonly used by farmers, grain elevators, and other agricultural businesses that deal with corn. These contracts are used as a tool to manage price risk by locking in a certain price for a future delivery of corn. This allows businesses to plan ahead and reduce the uncertainty that comes with fluctuations in the market.
To understand how a corn basis contract works, it is important to understand the difference between the cash price and the futures price. The cash price is the price that a buyer or seller pays for corn at the local market, while the futures price is the price that is quoted on the commodities exchange for a specified delivery date in the future.
The basis is the difference between these two prices, and it can be positive or negative. A positive basis means that the cash price is higher than the futures price, while a negative basis means that the futures price is higher than the cash price. The basis can fluctuate depending on a number of factors, including the supply and demand of corn, transportation costs, storage costs, and other market conditions.
When a corn basis contract is used, the buyer or seller agrees to a certain basis level for a specific delivery date. For example, a farmer might agree to sell corn for a basis of -20 cents per bushel for delivery in six months. If the basis remains at -20 cents per bushel at the time of delivery, the farmer will receive the agreed upon price, regardless of what the cash or futures price may be at that time.
In conclusion, a corn basis contract is a useful tool for businesses in the corn industry to manage price risk and lock in a certain price for a future delivery of corn. By understanding the difference between the cash price and the futures price and the factors that affect the basis, businesses can make more informed decisions about when to enter into a basis contract.