basis levels

[bbrindle]

We, at the Alberta Grain Commission, have been publishing a provincial range for canola basis levels for little while. You'll find it here: http://www.agric.gov.ab.ca/economic/stats/grdaily.html (or go to Ropin' the Web, Agencies, AGC etc. They were $6-20 a few weeks ago and are now $8-24 under Nov. What does that tell you? I'd be interested in your feedback on this information. Someday I'd like to publish the ranges by regions, like we do the average prices. Would you be interested in seeing more basis info, rather than flat prices from the AGC?

[monaco]

Brenda - yes I for one would like to see a basis level range by region . What IS going on with such a wide range for Alberta ?

[bbrindle]

I'm not ignoring you. You've asked a very good question and I'll be back with more info and a response.

[shelka]

Basis is a BIG indicator of supply/demand - even per region. Basis can widen for a number of reasons. One being that supply is ample and your canola is not in hot demand. Alternatively, in this case, if a particular location narrows their basis, it means they need your canola (are short). Hope this helps.

[bbrindle]

Good clear comments in the above message about what basis tells you. Supply and demand varies around the province. Some areas will have full facilities, others not. Some are a further distance from markets than others. Essentially some want to buy now and some don't. I can verify that the basis range is indeed that wide around Alberta. In fact, it could be even wider as we don't collect from everywhere. Some people will look at that wide range, and say 'but that's useless!'. I would argue that there is a very important message in that range. The range reflects a marketplace that is bigger than many producers perceive. The structure of the industry is changing. That's an old cliche -- but what are farmers doing different as a result? I can only hope they are seeking opportunities. This wide basis range points out that 1) you need to use a telephone, 2) you need to have an up to date list of buyers (including cash brokers), 3) you need to shop around and not be too loyal to any one buyer, 4) and you need to seek out and wisely use commercial truckers. Above all, spending time at a desk or with a phone does pay off. To say 'it's too far away to go there' is a simplistic excuse. If your closest basis is $25 under, then you have $14/t you could pay for trucking to get to the one that is $10 under and still be better off. (Also note that for $25 under you have to deliver whereas the example of $10 under plus $14 freight would be picked up, so an added benefit). That's blunt, but it is also why it is so important for farmers to understand basis. There's a measurable financial benefit from spending time on marketing. Farm organizations are fighting over changes to the grain handling and transportation system. Everyone is trying to find ways to get the costs in the handling system lower. That's important. But meanwhile, you could be calmly putting those few extra few dollars in your pocket, today. The answer doesn't just lie in a market driven system. It lies in farmers taking advantage of a market driven system and doing their part to seek out the opportunities.

[shelka]

It's also important to be aware of basis contract opportunities in the future. Many producers I know have taken advantage of good basis levels from 6 months to one year to over one year in advance! For example, some producers have already booked VERY attractive basis for off the combine barley ... September/October 2000.

[shelka]

Discussing basis levels and the huge variations in canola is interesting. Of course the components of the basis in canola and wheat are virtually the same. Don't mistakenly assume that there is a lower basis level on canola than wheat by looking at the Saskatoon based futures prices. The canola basis still holds relevance to Vancouver cash pricing. Canola basis is usually higher than wheat. By virtue of the marketing system for wheat, there is some significant risk removed for every farmer who delivers wheat through the year. To illustrate this, the terrible shipping year of 96-97 saw demurrage costs to every tonne of wheat of 95 cents per tonne. Compare that to the fluctuations you're seeing in canola basis of $10/t or higher. Of course grain companies have to include some money in their canola basis to cover demurrage risk they may face in the long run, especially when there is constrained shipping. This is true whether the shipment is domestic or export. The point here is to demonstrate that there is benefit in having the CWB involved to limit that basis risk. Also, it can pay benefits to the farmer to shop around to find incentives to deliver which can reduce their basis. If the CWB gets confined to receiving the grain at the spout at port position, I suspect that we'll see a variable wheat basis similar to canola. Perhaps this will drive the costs out of the system through competition for tenders, or perhaps it will result in widely varying basis for farmers throughout the year. Perhaps the result will be both of these, depending considerably on where you deliver, main line or branchline.

[charliep]

I would go a little easy on comparing canola basis to CWB deductions as they are like comparing apples and oranges. CWB deductions reflect the cost of moving wheat and barley to port position - elevation, rail, cleaning, CGC weighing and inspection. Other costs (interest and storage, CWB administration, etc.) are either deducted from pool returns or included in the CWB pooling costs at the end of the year. Interest on producer payments above initial payment (adjustments, interim and final payments) are also not included. The other element of basis that is left out is differences in world wheat cash prices. There is a cash market for wheat with variations in basis levels depending on world supply demand fundamentals for that particular class and grade/protein of wheat. These variations are hidden in the annual pooling calculations (the western Canadian farm manager sees only the assigned/calculated values used in payments spreads). They do exist, however, and are used in calculating the daily wheat offering prices the CWB uses for customers. To make this comparison in basis you are talking about, you would have to compare CWB sales prices delivered customer (North American and off shore) to what the cash market would have offered the farm manager on the same day. This cash versus cash comparison is a better reflection of what is happening in basis and more relevant in comparing to canola basis to that of wheat. The reason I go throught this approach is to make sure all components of basis are included in CWB calculations including the basis used in CWB pricing for actual sales to end users.

[charliep]

There sure has been a wide variation in basis. Local basis (Calgary) has varied from $25 over this summer to current levels of close to $15 under. Why the variation? 1) As indicated in other responses, supply demand is the major reason. This summer, there were boats arriving in Vancouver/crushers who had made sales and no canola in the system. The grain trade had to find a price that would break open the bins/generate deliveries. Just the opposite now. Farmers selling canola to pay bills, lots of canola in the elevator system and a relatively small export/crush program relative to the amount of deliveries. 2) Basis levels are a way of bring local cash prices in line with product values. Recent board crush margins are ugly reflecting the fact canola futures values are artificially high (for whatever reason) relative to product. A function of basis is to bring local cash markets in line with that of end user values. 3) Quoted basis is becoming less of a factor with premiums in the market (do I have a deal for you if you price by 4:00 this afternoon) taking on a bigger role. My experience in a past life is that a premium offered in the country generated way more deliveries than a narrow basis levels. Why? a) most farm managers don't understand basis anyway (they don't know the difference between a good one and a bad one) so why expose yourself by being aggressive on basis/allowing competition to match/better, 2) a premium gave the elevators sales people a chance for a phone call and a request for commitment (all part of the customer relationship building that all grain companies are involved in) and 3) maintain the ability to screw anyone who is stupid enough to put their canola on a 90 unpriced contract/some of the minimum price contracts (you only get the premiums if its fresh deliveries/commitment). Is variation in basis an acceptable price risk or should there be some system in place to manage it? Example: some type of price/basis pooling, better delivery alternatives on futures, etc.

[charliep]

Charlie - you and I have to quit writing like this!!! My wheat-canola basis comparison was made including all costs that the farmer pays, directly or indirectly through the pool. The point was, all these cost factors exist whether you're looking at canola or wheat. There isn't the same variation on wheat basis, which is a benefit from sharing the timing of delivery risk through pooling. The components of basis that a company uses to do their calculation includes freight, handling, interest on money, amount to cover shipping delay risk, weighing and inspection, terminal handling and cleaning. Instead of highlighting these true costs for the farmer to see, its all rolled together and called basis. Lately I've seen comments from farmers who are adding this up, and realizing that the canola basis levels can really get out of whack with the true costs. If you're in a position where you have to turn some crops into cash, you get taken advantage of. I realize that if there is no market, there's no market. Logistics constraints are playing into this limitation big time. The CWB has what I call a 'true cost' basis, because the cost to each farmer is the elevation, handling and cleaning from the point of delivery plus the costs incurred (not estimates) to the pool account the farmer pays indirectly (country elevator carrying charge, terminal storage, demurrage, additional or adverse freight, terminal drying, CWB admin espenses) These costs are netted out with the interest earnings of the pool account. All of this in 96-97 ended up at $5.85/tonne in 96-97, the year of the big demurrage problem. 97-98 was $3.34/t and 98-99 numbers are being finalized. I expect this year will be about the same, $3-$4/t. Add your local elevation handling and storage (say $48/t from Saskatoon) and the total basis cost to the farmer for price comparisons in-store Vcr or St. Lawrence is about $52/t. The current cash bid instore Vcr canola is $308.50/t today. AgPro, Saskatoon cash bid is 250.44/t. This reveals a basis $58 to Vcr spot price. Thre freight is the same as wheat, so the difference is handling costs, interest carry and 'deterence' because the companies can't physically get product to port position. (note that there isn't a separate domestic price - the port action is the driver). The spot price is about $4 over competitive port bids from other countries as the premium is asked for stock swapping for anyone short at Vcr right now. Also, there are basically no offers at Vcr as the logistics system is booked up in the near term. I realize that the canola marketing system has to get the message out if they can't offer on sales because of logistic constraints (which is what I'm hearing). Also I'm hearing that basis levels will stay pretty wide unless the futures slips back and it encourages some buying particularly from the Chinese. That may be a good time to lock in basis levels if that happens.

[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.