The Basis for Corn in Different Regions of Pennsylvania

James W. Dunn

The basis is the difference between the price in a location at a particular time and the price of the nearby futures contract. This value is helpful for calculating what the current price of a futures contract implies about the local price at some time in the future. With this information a farmer who will be buying or selling corn in the future can get a current market estimate of that price and use it for planning. The opportunity to hedge, either using the futures market or with a local forward contract, may allow the price for the farmer to be known with near certainty.

The idea behind the basis is that corn prices move together because there is one national corn market, and the Pennsylvania market is a tied to it.  The graph below shows how the prices move together.

 The following table shows the monthly basis and yearly average basis for the regions in Pennsylvania for which the Pennsylvania Department of Agriculture collects corn prices. These prices are derived from the weekly Grain and Hay Report, as prepared by the Market News Service of the Pennsylvania Department of Agriculture and the closing price of the nearby corn futures contract on the Chicago Board of Trade.  Thus the basis numbers shown are the average difference (in cents per bushel) between corn futures prices in Chicago and the corn price in the respective region. For example, if the March futures contracts are trading at $4.14 per bushel in Chicago, the average corn price during March can be expected to be $4.14+$0.27=$4.41 per bushel in Central Pennsylvania and $4.14+$0.33=$4.47 per bushel in Southeastern Pennsylvania. Although the basis is not perfectly predictable, its variability is considerably less than the corresponding cash price.

Several factors affect the difference in basis between regions and between months including the distance to Chicago, infrastructure, the time of the year, and storage capacity.

The major determinant of the difference in basis between regions is transportation costs. In most months, the basis is approximately the cost of transporting a bushel of corn from the Midwest to that region. The further a region is from the Midwest, the higher the transportation cost and, consequently, the higher the basis. Therefore, as the table shows, the basis in Southeastern PA is larger than the basis in Western PA.  The basis was especially high in the 2002-03 crop year.  It is clear that the basis is strongly tied to the size of the PA corn crop.  The figure below shows this.  The 2007 corn crop is about 125 million bushels and the basis is about 30 cents in December 2007 which is consistent with the figure. 

Infrastructure also affects transportation costs, since infrastructure determines how accessible an area is. Because Southeastern Pennsylvania has better rail service and larger storage facilities, the transport costs to the Southeast compared to those to Central Pennsylvania are lower than the distances would suggest.

Local supply and demand conditions affect the basis, especially in the late summer and early fall. As expectations about the harvest become realized and the available supply is known, local markets must absorb this supply. Local prices may be lower at this time than transportation costs would suggest, as storage facilities are full. After January, the local glut is usually worked off and the basis rises by about 10 cents to more accurately reflect transportation costs.

Storage facilities allow producers more leeway in waiting for an acceptable price. If prices are low, producers can hold their crop until the price rises. Therefore, greater storage capabilities relative to local production should be reflected in higher local corn prices, and a higher harvest period basis.

The basis data in visual form for the Southeast is shown below.  The lower basis in the last few months of the year and higher prices otherwise are present in almost every year and region.  In all regions the summer basis is high and especially variable.

Regional Detail

Southeastern Pennsylvania includes the counties of Lancaster, Lebanon and counties to the east.

Central Pennsylvania includes the area bounded by Clearfield, Cambria, Dauphin, and Columbia Counties.  I have the information to update these tables and can supply them to you if requested. The averages are about 2 cents per bushel higher because of the high basis in 2002-03.

South Central Pennsylvania is bounded by Bedford County on the west and Cumberland and York County on the east. I have the information to update these tables and can supply them to you if requested. The averages are about 2 cents per bushel higher because of the high basis in 2002-03.

The Lehigh Valley region includes Luzerne,  Schuylkill, Carbon, Monroe, Pike, Lehigh, and Northhampton Counties. I have the information to update these tables and can supply them to you if requested. The averages are about 2 cents per bushel higher because of the high basis in 2002-03.

The easternmost counties in the Western Region are Warren, Forest, Jefferson, Indiana, Westmoreland, and Somerset. I have the information to update these tables and can supply them to you if requested. The averages are about 2 cents per bushel higher because of the high basis in 2002-03.

I would appreciate and comments, corrections, or additional insights about the basis in Pennsylvania.  Please send me an e-mail at jwd6@psu.edu , write or call me.  I have the underlying data and more detail about each region for those interested.