Grain Elevator Operator

Interesting article describing "basis" and how it is used by grain elevator operators.

THE LAST CONTANGO IN WASHINGTON
by Antal E. Fekete,
Professor Emeritus, Memorial University of Newfoundland
June 4, 2006

One paragraph:

Rationing warehouse space

Moreover, the basis also helps the grain elevator operator to decide what type of cash grain to buy and store. Other things being the same he will buy the grain with the higher basis, and sell the one with the lower. In this way he can maximize his profit derived from the shrinking basis. If the basis is higher for wheat than for corn, then he will keep buying cash wheat in preference to corn until the basis for corn catches up. Or, suppose, the news is that corn blight has hit the growing regions. The astute grain elevator operator will respond by accelerating his sales of cash wheat, in order to make room for more corn in his elevators.

The best way to think about the business of the grain elevator operator is to assume that he is marketing warehousing services, including the rationing of warehouse space between competing uses. His guiding star is the basis. High and rising basis tells him for which purposes the demand for scarce public warehouse capacity is the most urgent. Low and falling basis tells him for which purposes the demand is slack, as people prefer non-public solutions for their storage problem, e.g., by keeping supplies closer to home, as often happens in troubled times. Including digging holes in one’s own backyard.

The idiosyncrasies of the basis with regard to monetary commodities, since they can be buried in holes, are quite different from those with regard to non-monetary commodities, which cannot. This will be the subject of the last of this 3-part series on the basis.