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Understanding the markets through basis

First, a quick review of new pooling options offered by CWB.

CWB pooling options

The winter pool will operate like traditional pools, and features a six-month pooling period (Feb. – July) that enables farmers to capture late-season prices, without risking the daily volatility of the cash market. Sign up is from December 12 to February 15 or until tonnage goals are reached, with delivery guaranteed by July 31.

The winter pool is being offered for wheat, durum and canola.

The futures choice winter pool has the same features as the winter pool, with the flexibility for farmers to choose futures values in order to capture market peaks. Only CWRS grades of wheat are eligible utilizing the Minneapolis wheat futures contract.

Sign up is from January 7 to February 15 or until tonnage goals are reached, again with delivery guaranteed by July 31, 2013.

Farmers can choose when they think futures values are at or near their highest and lock them in any time before June 21.

The basis will be pooled or averaged from all sales made during the pooling period. 

For more contract details refer to the CWB website (www.cwb.ca).

Basis contracts

Now let’s talk basis contracts and how you can use them to get a better read on what is happening in the marketplace.

Traditionally, basis is a deduction (the cost of doing business with a grain company) to be taken off of the futures value you lock in to give you a net delivered price. A larger (wider) or smaller (narrower) basis number will tell you which company needs or wants your grain and which ones don’t, at any given time.

Now let’s take it one step further up the chain to see how basis can tell us what is happening on the other end — the buyers’ side of the market.

Let’s remember that end buyers are contrarians to farmers as they hate high futures values.

If a buyer thinks market prices are going to fall, they will try to wait out the markets. If buyers are on the sidelines waiting, grain companies are not making sales, so they will protect themselves by widening their basis levels to discourage farmers from selling or delivering grain.

The best strategy for a farmer to use at this time would be to lock in the futures only portion of a pricing contract for delivery one or two months out. When the buyers come back into the market, grain companies will start to narrow their basis levels in an effort to encourage farmers to sell grain to them to meet those sales.

This is when you lock in the basis on your previously committed futures contract and/or lock in additional tonnes on a basis only contract for one or two months down the road with the hopes that futures values will rebound in that time and net you a higher value for your grain than the current market value.

End buyers

Now let’s look ahead to next year and try to determine what end buyers and grain companies are thinking will happen by looking at basis levels.

Every buyer has a different buying strategy depending on their needs and their analysis of the markets. Some may buy what they need for the coming year all at once; others may buy bits at a time hoping that markets will fall and they can buy cheaper product later.

End buyers usually need a consistent supply of grain to meet their production and processing needs to maximize profitability. Their goal is to buy as cheap as possible, but at times guaranteeing supply may be more important than price. That is what will drive market demand and price.

If world supplies are tight for a specific grain, buyers will look for cheaper alternatives wherever possible. If they are concerned that price will go higher they will look to secure supplies by talking to grain companies and locking in forward sales contracts to ensure their business can continue without supply disruption.

Grain companies will try to secure grain from farmers to meet sales contracts by offering attractive basis levels on their forward delivery contracts to get farmers to commit tonnes. Farmers need to watch for these opportunities to lock in basis contracts for forward delivery.

If world supplies look to be surplus, end buyers will tend to sit back and only buy small volumes as needed, always looking ahead with the intention of buying cheaper in the future.

In this kind of market, grain companies will tend to keep basis levels wide so that they have some negotiating room when bidding to sell grain to the end users in an oversupplied and competitive marketplace.

Other short-term pricing opportunities will arise when companies are looking for limited tonnes to fill a sales commitment. Usually they will narrow their basis aggressively at specific delivery facilities to attract enough tonnes to fill the sale, and then widen it out just as quickly. These pricing opportunities come up with little or no notice so you need to be monitoring and watching for such events as the premiums offered can be very lucrative at times.

The end result for farmers is that every dollar you can save on a basis contract is a dollar in your pocket. A better understanding of how basis is used by grain companies to manage risk and volumes will help you make better marketing decisions and improve your farm’s profitability. †

About the author

Columnist

Brian Wittal

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.

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