My last column talked about futures spreads, and how you understand what’s happening in the marketplace by watching how and why spreads change over time.
Now, a look at more pricing signals: grade and protein spreads.
During the era of the Canadian Wheat Board, grade and protein spreads changed very little throughout the marketing year. The CWB, if it deemed it necessary, adjusted grade or protein spreads when it adjusted initial prices. Otherwise, spreads remained static.
In today’s marketing world, grade and protein spreads can change on a daily or even hourly basis, depending on the time of year and what the grain company needs to buy.
If you know when grain companies are adjusting their grade and protein spreads, you can get a good picture of what is happening in the market and make more informed selling decisions.
When they set or adjust grade and protein spreads, grain companies will consider how the harvest has gone, and the quality and protein for the majority of production. A good quality high protein harvest will likely mean the spreads will be narrowed, as there is plenty of good quality grain to meet sales demand.
With a poor quality, low protein harvest, it’s likely that spreads for the higher quality and higher protein grain will improve. Grain companies will offer premiums for better quality, as it’s hard to come by and in demand. Discounts for lower quality grades will likely widen, as there is too much lower quality grain, and the grain companies will have a hard time selling it all.
Part of the basis
Grade and protein spreads are components of the basis.
Basis is another market signal that you need to understand so you can make marketing decisions based on what the basis is telling you about the current or future market demand for your products.
The main components of the basis includes freight, elevation, cleaning and handling charges plus grade and protein spreads, currency conversion (if the grains are traded against U.S. futures markets) and lastly risk or profit margin.
Once the freight, elevation, cleaning and handling charges have been set for the year they do not usually fluctuate much. So if basis levels are bouncing around and narrowing in or widening out it will be because of factors related to quality (such as grade and protein), the amount of production available, or if a grain company needs a specific grain to meet sales or fill cars. When those factors are in play, you will see the basis change and fluctuate.
Strong futures values don’t necessarily mean a strong bid price at the elevator for your grains.
Futures may be rallying, but if grain companies aren’t making sales because buyers are stepping away from the market to wait for the futures prices to fall, then grain companies will widen their basis levels to stop producers from wanting to deliver grain. A wider basis indicates that the grain company doesn’t want to buy grain — they may not be able to sell it, and they don’t want to own it at a price that could be higher than they be able to sell it for later.
On the other side of the marketing coin, there are times when grain companies need to buy additional tonnages to meet sales demands or fill cars at a time when futures prices are low. In this case, farmers aren’t selling (they’re waiting for futures prices to improve), so grain companies will lower their basis levels to get producers to start hauling grain to them. Once they have enough grain to cover their needs, they’ll widen the basis out again to stop producers selling. You need to keep a sharp eye out for these opportunities to lock in an attractive basis if it meets your marketing needs.
Understanding historical basis levels and how the current year compares to an “average” year as far as total production and quality are concerned is key to being able to determine if current quoted basis levels are good or bad, and if you should be locking them in or waiting for them to improve.
At certain times of the year, grain companies may offer attractive new crop basis contracts to get producers to commit grain for delivery at harvest, so they can make pre-sales for fall shipment.
When you see these basis offerings, if they look attractive or better than the average historical basis for that time of year, you may want to sign up some tonnes, knowing of course the risks that you are taking on by doing so early in the year.
Keep these things in mind when discussing pricing strategies and setting a marketing plan and you will have a better picture of where the pricing opportunities exist and be able to take advantage of them.