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Basis: A Smile From The Market

A man walks into a crowded pub and catches the eye of a stunning brunette. She flashes a quick smile and looks away. He has noticed a signal. Now he must interpret that signal. Is she simply a friendly person who smiles at every guy? Was this a flirtatious invitation to a conversation? Or was she smiling at the enormous gentlemen who walked in behind him?

As growers, the markets are always giving you signals. Your interpretation of these signals and reaction to them can determine the success of your marketing campaign. Basis is one of these signals.

Let’s look at the canola market specifically. How can you assess the canola market using basis levels as a signal? Basis is symbolic of the cost the marketing company associates with handling, cleaning and shipping of canola. Sometimes, unlike standard elevations, canola basis levels can vary from $35 to $40. How and why can basis fluctuate with such broad variances? Can it be used to manage price risk or improve profits?

WHAT BASIS TELLS YOU

Let’s use the gent at the pub as an example. Forget the brunette, she was smiling at another guy, I just threw that in to get your attention. Of note however, is that it is a Friday night, the local hockey game has just concluded and the band is about to go on. To gain access to the action our friend has paid a $10 cover charge. Why? Because the owner of this fine establishment knows this is where people want to be tonneight, he knows they will come out to have some fun and they will pay $10 to do so. He knows he does not need to be aggressive, the flow of patrons will come, he may even feel the need to limit the number of party goers and he does so by means of added cost.

Conversely, on a Tuesday evening when we all have work the next day this same proprietor will not only remove his cover charge but he also may add a drink special to attract patrons. He knows people are far less eager to fill his pub; he again attempts to adjust the flow of traffic by reducing costs.

Canola basis levels are very similar. At harvest when marketing companies know growers may have storage or cash flow issues, they know growers are more inclined to bring volume to the market. It’s likely you’ll see far less aggressive or downright offensive basis levels at $30, $35 or even more. What is the signal? Companies know you want to sell, and they have to manage their own storage and sales; basis levels drop because they can.

On the other hand, perhaps in spring when yards are soft or road bans are on, growers are less likely to move significant volumes to market. What happens? The market signals its eagerness to have greater volumes of supply, with levels closer to even or in some cases positive.

CAPTURING VALUE WITH BASIS

The real question is how growers can capitalize on these basis fluctuations. It can be difficult to assess and capture the added value of a changing basis. If you are in a cash rich position and have the option to sell only when the basis is at a low negative or even a positive and the futures price is attractive to you, then the choice is easy. If however you are forced by other factors, like storage constraints or a need to generate cash flow, some selling decisions are dictated to you, making choosing the right time to price more difficult.

Most major buyers of canola will offer basis contracts that allow the grower to “lock” a basis level without pricing the canola itself. If, for example, it’s early in the season and you sense huge potential in your canola yields, more than your storage can bear, you have decisions to make. If you feel bullish on the futures price yet the basis for September delivery is attractive you could lock in that basis for the number of tonnes you believe you will need to bring to the market. Most of these contracts allow for delivery without pricing the canola itself so you may be able to alleviate some storage stress, obtain an attractive basis level and still have some price flexibility. Pretty positive stuff! Your local customer service rep should be able to explain all of the options offered by their company and you can decide what suits your operation best in that instance.

The downside to any of this is that by locking in a basis, you have promised to deliver a certain volume to the market at a certain period. This undoubtedly influences the mind of the professional canola trader. Traders will view the number of basis contracts to grower deliveries as a market signal as well. They will use that information to their own advantage on the futures market and this can negatively impact the price of canola futures. As a grower you really cannot prevent this, you must bring your canola to market at some point, and the market will be signaled in a small way when you do, but don’t be afraid to give the market a tease of your own, selling increments of your production here and there as spots seem appropriate.

This isn’t new information for most growers, but it’s good to remember that whether it’s canola, pulses, cereals or other crops, the market gives signals every day. Gather as much information on these little smiles and winks from the market as you can. Tap into the opinions of as many market analysts as possible, keeping in mind that opinions will vary, but each piece of information will help you form an opinion for your farm. Once you’ve got a marketing plan developed, don’t over-think or overreact. The best decisions are made on solid market intelligence.

Jeff Jackson enjoys an evening out at the pub now and then when he isn’t working hard as export marketing manager with Wigmore Farms (www.wigmorefarms.com)based at Regina, Sask. Have you got a marketing strategy question? Send them to [email protected]or call 306-757-3005

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