basis

[makar]

I must be one dumb ukrainian. I heard my grain company manager say to someone they make no more money at 6 conola than at 15. Hello the basis has gone to 100 dollars. What am i missing.

[sidvicious02]

Makar, basis is just a barometer of market supply/demand (typically more of a near term s/d versus futures). Believe it or not basis levels for canola could be -100 and a company could be making no more money then when it's at 5....it's all related to how much the end user is willing to pay for the seed. Most end users in the world are flat price buyers and if you can bare through this rudimentary example.....if the Chinese are shopping for canola and equivalent value of soybeans are $500/tonne then they won't likely pay more than $500/tonne for canola. They don't care if the basis is 50 FOB Vancouver or -50....they just want it for $500. So if the futures are at 450 then the basis is 50 for them (minus $50 freight, elevation, interest, storage, etc) and net price for you is $450/tonne. If the futures happen to be at $500/tonne, then selling basis is $0 and basis to you,using the same $50 deductions, is -$50. Of course, this is all the elevator companies risk, if they go and sell it for equivalent -$50 basis...they might be happy they got the sale but all of a sudden be in deep because they have to source it at those levels when everyone else is paying -$40.

Another different way to look at this is an elevator company is probably going to make more when canola is at $12 then at $6 because you are going to shop a lot less and not try quite as hard to squeeze every last nickel or penny out of the bid. Of course there is the buyer on the other end...and he's likely going to try and squeeze hard when shopping for a 50,000 tonne vessel and the price is now $12/bu vs $6/bu a little more than a year ago!

I hope that was somewhat coherent! I've had more than a bit of experience seeing it from the other side...since i worked for a grain company for nearly 10 years (farming now though).