The continuous development and improvement of the corn industry chain futures market has prompted some industry enterprises to have a shot in basis trading. It is learnt at the “11th International Corn Industry Conference” held on September 12 that basis trading can return to the spot trading mode through immediate spot pricing and is also possessed with the unique advantage of forward pricing, which will fundamentally change the buyer-seller relationship from competition to cooperation. Present guests believed that basis pricing will become the mainstream pricing and trading modes for corn and other products in the future.
Strengthened futures-spot interaction creating conditions for basis trading
Basis trading is essentially a kind of spot trading with a different pricing mode compared with common trading – adopting the 2-pricing mode of “futures price + basis” instead of fixed price in contracts. Basis trading is generally adopted in forward spot trading as it can resolve the contradiction between the seller’s prompt profit and the buyer’s picking-up at the price in line with market conditions.
The continuous development and improvement of corn and corn starch futures and the increasing interaction between spot and futures prices have created key conditions for basis trading. Basis trading has changed the traditional pricing mode and has three main features compared with traditional trading. First, the profit points of the buyer and the seller is separated. The seller decides profit in selling basis and the buyer determines cost in spot pricing. In this way, the two sides would cooperate to judge the futures market trend instead of haggling over every pounce in price. Second, the buyer and the seller jointly manage the futures hedging and enjoy the profits (the basis-quoting side fixes a small portion of profit and the spot pricing side gets the profits from price change). Third, basis trading is a bridge between spot market and futures market that allows spot trading participants to make use of options to increase income.
“If the basis and spot pricing are determined on the same day, it would be a traditional forward spot trading.” Wang Xiandong, Basis Trading Manager of Beidahuang Grain Group Dalian Branch, said that a complete basis trading market should have the seller’s basis, the buyer’s basis, and numerous middlemen with risk preference, which will jointly take part in basis circulation, while the physical spot should be directly delivered from the manufacturer to the consumer to reduce waste in logistics.
Upgrading spot trading mode
Basis trading can also serve as a bridge between spot market and futures market. Taking advantage of this feature and introducing options in basis trading, the spot trading can be transformed into options-included trading. For example, the buyer is entitled to choose the lower price in two times of pricing as the futures price in contract, thus being able to purchase corn with lower price.
For a corn trading company, it should go through 4 steps to complete a corn basis pricing contract. First, the trading company purchase farmer’s spot goods when the futures and spot goods have a basis difference in price; second, the trading company quotes basis and the demand side inquires, and the two sides sign the basis pricing purchase contract after confirming the basis; third, the trading company sells the futures at the same time to lock profits (futures price + basis - purchase cost); fourth, the buyer makes spot pricing, that is, the buyer informs the seller of confirming futures price during futures trading and the seller liquidates the futures. The two sides then confirm the contract price – the futures price in spot pricing + basis, and settle the payment and make delivery of goods.
“Basis trading is an upgraded spot trading mode with many advantages. We should learn more about it before making the most of it.” Wang Xiandong said that basis trading has some time value and purchasing at appropriate time would obtain lower price than the spot price when taking delivery of the goods. Besides, the analysis on the trend of basis trading differs from that of spot trading. Some unexpected factors that influence both futures and spot goods will not affect the trend of basis.