Choosing futures/basis contracts for your grain sales can be a challenge. The right answers depend on the timing and your situation
If you want to manage your own pricing risk for wheat in your own way, grain handing companies, including the CWB, offer futures/basis contracts that enable you to fix a price and delivery period for your wheat when you want.
A word of caution: very few grain companies are willing to handle wheat that has been priced on a CWB futures/basis contract, as these contracts compete directly with their pricing contracts. So before you commit to a CWB futures/basis contract call your local elevator.
The components of futures/cash contracts are the same with all companies. The devil is in the details.
Futures and basis
The futures side of the contract is pretty straight forward. All companies use one of three U.S. wheat futures as their pricing platform, depending on the class of wheat they are buying:
- Feed wheat — the Chicago exchange.
- Winter wheat and mid-quality milling wheat — the Kansas exchange.
- High-quality milling wheat — the Minneapolis exchange.
Be aware that companies may use a different futures month other than the nearby month when they price their contracts. When comparing prices make sure to ask which month they are using.
The basis should include all costs associated with getting your grain from the elevator to the end market: freight, elevation, cleaning, handling, administration fees and profit margin.
The basis you choose will determine which month you will deliver your grain.
Lock in price
You have the ability to lock in either the futures or the basis first, then lock in the other component at a later date (a two step process).
Or, you can price your grain using a net price or deferred delivery contract. With these contracts the futures and basis are locked in at the same time giving you a net price for a future delivery period (a one step process).
Which works better? It depends.
It depends what time of year it is, what the world economy is doing, what the world markets are telling you about grain prices, whether your grain is the field or in the bin, your quality, historical futures and basis prices, and how much time you devote to marketing your grains.
Consider all of these points and more when you put together your marketing plan.
It is early in the new year and grain futures are historically high due to world economic and market uncertainty. Basis levels are traditionally wide at this time of year because very few actual sales have been made yet by grain companies. You may want to consider locking in the futures only to secure that higher value and wait for the basis to narrow in sometime in the future.
At times throughout the year, as futures cycle up and down, there are times when the futures are low and grain companies will narrow their basis in dramatically to get farmers to commit the deliveries they need to ship against a sale. At times like this, you may want to consider locking in the basis only, with the intent to wait until the futures recover to higher levels before locking them in.
There are times when futures are at historically high levels and the basis at historically good levels so you may just lock in a net price/deferred delivery contract and call it good because you don’t think it will get much better than that for awhile.
Once you have the futures and basis components of your contract priced there should not be any further deductions taken off of your net contracted price as long as the grade you deliver equals the grade you contracted. If it doesn’t a grade spread adjustment will apply. Spread adjustments will be made for grade, protein and moisture that vary from whatever your base grade was on your pricing contract. The grade spread that will be added or deducted is determined by the grain company the day you get your cheque.
The spread will be calculated based on their ability to work with the grade you delivered and current market spreads based on sales they have made.
These types of contracts and strategies apply for pricing any grains where there is a viable futures market trading, and you can lock in a value when you think the time is right.
The major risk involved with using these contracts pre-harvest is that you are committed to delivering the tonnes. If you should experience a major crop loss event you will have to buy out of your contract if you can’t deliver. The buyout is a simple calculation, if your contracted futures value is lower than the current day’s future value you owe the grain company the difference for every tonne of grain you can’t deliver, plus a possible administration fee for processing the buyout contract. This can get expensive, fast!
So what percentage of your anticipated production should you risk pre-pricing, pre-harvest? That depends.
Based on a number of the points mentioned above you need to evaluate each grain separately to determine the best pricing strategy. That will be the topic of my next column. †