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Understanding today’s wheat basis

It’s not always simple to calculate the true basis these days. Here’s an example

In my previous article I was remiss in detailing the fact that there are costs for freight, elevation and handling that must be accounted for within the wheat basis that the grain companies post.

To clarify a few things I am going to do a complete calculation of price, costs and basis levels starting with the price the grain is sold for at port, less all deductions back to the elevator net to the producer and see what we come up with.

The numbers

For a port price I have gone to the Government of Canada website where I find the weekly price summary for grains sold at the West coast. On Feb. 20, 2015 the indicator price for No. 1 CWRS 13.5 per cent at the West Coast FOB (free on board the vessel) was $336.93/tonne ($9.16/bu.).

Now we must determine the costs involved for getting the wheat from the producer in to the elevator, then to the terminal and finally onto the vessel.

Next we go to the Canadian Grain Commission (CGC) website where we can find the elevation and handling charges for all port and inland grain terminals and elevators. The most recent numbers are from December, 2014.

Between the various terminals at the Port of Vancouver the charges for receiving, elevation and loading out ranged from $9.50/t to $10.45/t. For easy math we will use an average of $10.00/t. Cleaning costs ranged from $5.80 to $5.89/t so we will use an average of $5.85/t. CGC outward official inspection fees are $1.63/t. All total the costs at port to get the wheat unloaded from the railcars, cleaned inspected and reloaded onto the vessel are averaging $17.48/t. There are a number of other fees for special services depending on what may be required before the grain is loaded on a vessel but for this exercise we will assume no other costs are needed.

Next we need to determine the costs to get the wheat from the country elevator to the Port terminal — the basis the grain companies offer you. These costs would be freight, elevation and handling fees at the country elevator. Again, the fees charged vary among grain companies so I am going to use $53/t as an average of all the costs based on a facility at Lethbridge.

From all of this my math tells me that the costs to get wheat shipped from the country elevator to the port terminal and onto the vessel is $17.48/t + $53.00/t = $70.48/t total.

Now if we take the February FOB price of $336.93 and subtract $70.48 we end up with a price of $266.45/t ($7.25/b). This price should be a true market price at the country elevator because we have accounted for all of the freight elevation and handling charges needed to get the grain from the country elevator onto the vessels at port.

The only thing we have not accounted for is any additional risk coverage or profit the grain companies may wish to take in this transaction. Those costs would have to be deducted from the $7.25/bu. price we had previously calculated.

Now, you could argue that the grain companies have already taken a profit in their handling fees so why should they take more profit? The answer: because they can. To be fair there are market risks and unforeseen risks such as demurrage and currency fluctuation that they could encounter from day to day and this is a way for them to help protect their business from the potential loss of profit they could face from those risks. So let’s figure out the rest of this equation.

Now we will take the elevator posted bid price that I used in my previous article —$6.15/by on Feb. 24, 2015, and subtract it from $7.25/bu. We have a difference of $1.10/bu. So in addition to getting paid to handle the grain, grain companies are taking an additional $1.10/bu. (15 per cent) for other risks and or pure profit.

Now in comparison, the posted quote for No. 1 CWRS 14 per cent delivered to Sweetgrass, Montana, was the Minneapolis futures at US$5.68 plus a $0.15/bu. basis for a net delivered price of US$5.83/bu. Multiply by 1.24 to convert to Canadian dollars and you have a price of $7.23/bu. Now we must adjust the price lower to be equal to a 13.5 per cent protein bid so let’s deduct $0.15/bu. for the additional half a per cent of protein which would bring the price to $7.08/bu., so we can compare apples to apples.

The costs to move grain from Lethbridge to the port of Vancouver ($53/t) are close to what the costs would be to move grain from Sweetgrass to the ports of Portland ($44/t) so the net price offered to producers for delivery to those facilities should reflect only that difference between the costs at those two facilities. So now if we take the $10/t ($0.27/bu.) difference in costs and subtract that from the Sweetgrass bid price it should give us a more true price comparison. So: $7.08 – $0.27= $6.81/b.

Now we have a price delivered to Lethbridge that is $6.15/b and a price delivered to Sweetgrass that is $6.81/b. The difference is $0.66/bu. or $24.25/t.

Why?

What’s the difference?

Market demand, sales, logistical issues, freight, currency risk, profit. All are factors as to why there is a difference in price between these two delivery points.

What I am trying to show is that the Prairie grain companies have room in their pricing model to be a little more competitive with prices in the U.S. if they want to be. Do they want to be competitive or not? If not why?

Do they not have grain sales on the books?

Have these major world players shifted their focus towards greener pastures as far as sourcing and selling grain in other countries where the opportunity for future growth and expansion are far greater for their shareholders? In Canada, they know the market is mature and they have it locked up — they don’t have to worry about losing the grain. They can let it sit until they need it to fill sales.

Like it or not, the Canadian Wheat Board was 100 per cent focused on selling Canadian wheat into world markets and they tried to sell the maximum amount of wheat they could every year. Now we have grain companies that look at things from a global perspective and will buy and sell wheat all over the world based on where they can make the highest net return for the organization.

I am afraid that this means Canadian grain will be treated as a secondary supplier to world markets because our costs make us uncompetitive at times. If this continues to happen what does that mean for Western Canadian producers? It means we need to find more localized markets for our products. The most logical place to find these markets is in the U.S., to get away from being at the mercy of the players in the world export markets.

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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