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Summer fun in volatile grain markets

With markets making moves, it’s a good time to understand “basis only” contracts

Activity in both the grain futures markets and the old crop and new crop deferred delivery markets has been dynamic in recent months.

Weather worries sparked futures markets dramatically higher in a short time. As the hot weather dragged on, buyers became eager to get their hands on old crop stocks, in case the new crop was a disaster. That pushed futures higher. They also adjusted basis levels aggressively to further entice farmers to sell their grain. This provided some great pricing opportunities.

New crop futures and deferred delivery values also rose over that time period, but not as high as the nearby futures values. There was some improvement in basis level values as well but again not as much as the nearby values.

Take Minnesota wheat for example. On June 1, the September futures were at $5.76 and then hit a high of $8.68 on July 5. On June 1, the December futures were at $5.81 and it hit a high of $8.43 on July 5.

The trade wanted to get its hands on available old crop stocks to keep mills running until harvest began, so they pushed the nearby futures higher than new crop futures values.

Globally, there are ample wheat stocks to meet demand, so grain companies in the U.S. and Canada didn’t want to end up owning too many tonnes of high-priced new crop wheat. They didn’t push new crop futures as high, and also didn’t improve basis levels for new crop as much as they did for old crop.

At times like these, producers need to pay attention to basis levels.

Basis contracts

First, confirm that your buyers offer a “basis only” and/or “futures only” contract for the grains you want to sell. This will give you flexibility to pick and choose when you want to lock in futures or basis levels.

For example, locking in a futures only contract would allow you to lock in values when they rally without being forced to lock in the basis component of the contract at a time when basis has widened dramatically.

Recently, basis levels have widened and narrowed as futures fluctuated, with canola basis levels widening by over $60/tonne at some companies and wheat basis levels dropping by over $1.15/bushel.

Understanding how basis levels change due to futures market fluctuations, harvest pressures and supply and demand will help you take advantage of good basis values when they are offered.

Some producers hate doing basis contracts because it locks them into having to price the grain eventually. If markets fall, they don’t want to have to price at lower levels.

Confirm this with the company you’re dealing with, but most, if not all, will let you roll your basis contract forward to give yourself more time to price your contract. They may charge you an administration fee of $1 to $5/t to roll your contract.

For example

Here is an example of rolling a basis contract:

You lock in a -$10/t canola basis contract for November delivery off of the November futures. You will have until the end of the second or third week of October to lock in the November futures value on this contract, or you can roll it forward to the January or March futures. Let’s assume the futures didn’t move much, so you want to roll the basis contract forward against the January futures. This would give you another 30 days to price the futures component of your basis contract.

When you decide to roll the basis contract, the grain company will take the futures spread between the November and January futures and add that to you basis contract value. So, if the November futures are at $500 and the January futures are at $504, then your new basis contract against the January futures will now be at -$14/t. You do not gain anything from the futures spread but you now have an additional 30 days to see if the futures will improve.

Basis contracts can make or save you big dollars if you understand how and when to use them as part of your marketing plan.

About the author

Columnist

Brian Wittal has 30 years of grain industry experience and currently offers market planning and marketing advice to farmers through his company Pro Com Marketing Ltd. (www.procommarketingltd.com)

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