Open market prices: reality or rhetoric?

Supporters of the CWB single desk have made comments in the media about wide spreads between country elevator prices and west coast port prices. Their assumption is that this means windfall profits for grain companies at the farmers’ expense. 


Some are arguing that this year’s lousy basis is the result of no longer having the CWB single desk. We are all troubled by the lousy basis levels, but let’s put it in perspective. 


The last year of the CWB single desk, 2011-12, saw the final pool return, in central Saskatchewan, work out to $1.12 per bushel under the average Minneapolis futures over that crop year.


This was $2.41 below the average west coast port price for the same time period.  


In the first year without the single desk, 2012-13, the average basis in central Saskatchewan was 82 cents under the Minneapolis futures. 


At $1.79 below the average west coast port price for that crop year, this was substantially better than the previous year under the CWB single desk.


And so far this year, the average country basis is $1.54 under, which on average is $2.99 below the west coast port price. The country-to-port spread has ranged from about $1.50 to more than $4.50 per bu. 


However, this year saw a market anomaly that most of us have never seen before: buyers not buying.  The short time basis was at its widest (or worst) during the same time that most grain buyers weren’t buying wheat. 


As a result, the average “effective” country basis is better than the calculated $1.54 under, and the average country-to-port price spread is not as bad as the $2.99.


So, although single desk supporters point to the widest spread all year as an indication that grain companies are making huge profits at the farmers’ expense, the facts don’t support it. How can you calculate profits when there was little or no business that occurred at the prices used in your calculation?


With the single desk, farmers had no control over the basis or spread to port prices: you got what the CWB got for you. In the last year of the single desk, that worked out to $1.12 under futures, or $2.41 per bu. less than the average port price. However, farmers now have more control, and that means marketing opportunities.  


In 2012-13, the first year without the single desk, the country basis averaged 82 cents under futures, but it was as narrow as 24 cents under and for the better part of the year it was better than 50 cents under. 


This year, country basis was as good as 59 cents under before it started its slide.


Comparing these basis levels with port prices, one year the average country-to-port spread was better than with the single desk and one year it was worse.


But the two years since the end of the single desk are more similar than you might think.


After entering the 2012-13 crop year with excellent prices for CWRS (nearly $9 per bu.), country prices slid dramatically to below $8 per bu. Farmers were unhappy, to say the least, especially those who didn’t price early.


As well, rail service was less than desirable, with a backlog of close to 16,000 cars by mid-April 2013.


Sounds familiar, doesn’t it?  This year, we had a backlog of 60,000 cars by mid-April and a basis of $1.85 under.  


However, the previous year was different in one significant way:  the average wheat basis was only 25 cents under at the peak of the rail backlog in mid-April. No one was complaining about basis, except perhaps grain buyers who were paying up to get fresh deliveries.  


Also, I don’t remember farmers complaining about poor movement last year. Why complain about shipping when there’s space in the elevator and you’re reluctant to sell it anyway?


Any way you look at it, we’ve seen better basis levels in each of the two years since the end of the single desk than in the final year under single desk control. Even in this lousy year, you had the opportunity to lock in a much better basis than the single desk did in its last year, and many did.


We need to take a hard look at reality before we consider a return to central control as a remedy for this year’s problems.  


In the past two years, farmers have had the opportunity to obtain a better basis and better spread to port prices than existed under the single desk. Open market critics should not cherry pick data and assume all farmers sold at the worst possible time.   


The fact that most buyers weren’t even buying when things were at their worst and most sales were done at better to much better basis levels should be enough to demonstrate how far off the mark their approach is.


John De Pape is the founder of Farmers Advanced Risk Management Co. in Winnipeg.

  • ed

    That is a cool bunch of double speak. The companies have indeed all got together and made a pact not to buy wheat as you say Mr. Depape. This when the hungry of the world are clamoring for it and have driven the port price to all time highs in an attempt not to starve. Mr. Depape simply referring to this as an anomaly and accepting it just because the youngsters in his analytical part of the industry haven’t seen it before in their short and naive careers is alarming. This and these types of people are the very reason that history repeats itself.

  • bob

    I agree with Ed. The methodology is poorly constructed and, as a result the conclusions have little merit. Attempting to rationalize the existence of an open market vs.single desk on the performance of basis levels over a 3 year period is rudimentary.