For example, a dairyman hedging his milk would take a short position by selling the BFP contract. A dairyman desiring to hedge feed costs would take a long position by buying a corn futures contract. During the planning process, the producer must examine feed needs, expected feed prices, expected milk prices, expected expenses, and debt load, as well as desired returns to management, owner labor, and investment. In addition, the producer must anticipate cash flow needs to cover ongoing expenses and debt payments. Basis Basis is the difference between the local cash price and the futures price at the time the milk is sold or the feed grain purchased.
Basis accounts for transportation costs, quality differences, and local market conditions.
Grain basis tables for several locales can be obtained from the Agricultural Extension Service in both Texas and Kansas. A producer will need to calculate the basis for milk FOB his or her pay zone. Basis can be seasonal and cyclical. In other words, it may tend to increase or decrease over the production or marketing year or show large changes across years. The BFP basis, as the difference between the Uniform Table 1.