basis levels

[charliep]

Tom A couple of ideas that I would like to highlight. 1) I think we need to get away from the concept of comparing basis to costs. Basis is really an adjustment to a futures price (a contract with very specific specifications in terms of grade, delivery location, timing, quantities, etc.) to that of the cash market. Cash markets don't always 100 % track futures -premiums and discounts are a characturistic of all futures markets where a delivery threat doesn't exist and therefore enforce discipline. This opens up another can of worms which I will leave buried for another question. 2) The other issue to highlight is the fact the CWB also sells into cash markets with variable basis levels. 3CWRS wheat sold to South America is priced off HRW gulf cash markets. Gulf cash markets have a basis relative to KCBT futures (hard red winter) prices reflecting transportation, protein, carry and premiums/discounts. North American markets sales and CWB ones off the St. Lawrence are priced off Minneapolis cash which again has a basis relationship with MGE futures (spring wheat). Sales off the west coast (S.E. Asia) have a basis for both high quality wheats (1/2 CWRS use MGE futures plus basis) and medium quality wheats (3CWRS and red prairie spring mainly based off KCBT). Some CWB wheat (mainly soft white spring and white prairie spring) will be priced with a basis relative to CBOT wheat futures (soft red winter). I can't comment on basis variability for all US wheat markets but I can tell you there is major basis variability for 1 dark northern spring 14 percent protein (used in all high protein wheat pricing off the west coast for markets including Japan) depending on quality of the crop and protein levels in a given year. 3) I want to highlight again that futures are for a very specific quality of grain. Basis will reflect the differentials for different grades/protein levels of wheat in the cash market. These adjustments are made (and price signals given farmers) through the annual spreads between grades and proteins you see in the PROs/final payment structure. Hopefully you find this discussion interesting and we get some more discussion going. I am always amazed by how quickly people are to jump on canola basis but how year in year they accept a CWB final payment without having the understanding of how the pooling system operates. My objective here is not to criticize the pooling system but rather to work toward some understanding and talk about how it compares to other systems. Hopefully we get some interesting discussion going.