Calculating wheat basis may require some homework

Tyler Russell saw something he didn’t like when he looked out at the crowd of farmers he was talking to about wheat basis levels.

“You could just tell there was confusion,” Russell, who is manager of Cargill Canada’s network of crop marketing advisers and farmer risk management, said about meetings he held with farmers last October and November to promote a new type of basis contract.

“You could just see it in their eyes or you could tell by some of the questions that they were asking.”

It wasn’t just farmers. Russell said some of the agriculture professionals who attended the meetings also didn’t have much of a clue about how to interpret wheat basis levels offered at country elevators.

That’s a problem for a company like Cargill, which has a more active farmer-marketing program than any other grain company on the Prairies because farmers probably wouldn’t feel comfortable or secure using futures or basis based contracts if they couldn’t understand how to figure out good, bad and average basis levels on wheat.

So for the next series of farmer marketing meetings the company held between December and February, it added a new, two-hour section: how to calculate wheat basis and build historical averages.

Russell said he was pleased that farmers seemed keen to learn the relatively complicated formula.

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“They get canola basis,” said Russell. “They get what’s good and what’s bad.”

However, the simplicity of canola basis levels, which are calculated on Canadian dollar-based futures contracts and few quality complications, can’t be reproduced in wheat.

The foreign exchange rate poses a complicated challenge for wheat because most companies post U.S.-denominated futures and then subtract a Canadian-denominated basis.

Russell said he taught farmers how to convert elevator final prices to a U.S. dollar value, subtract applicable U.S. wheat futures and come up with a U.S. dollar-denominated basis level.

World wheat prices and wheat futures prices are based on the U.S. dollar, which means Russell’s calculation is the most reasonable way to come up with values that mean something without the confounding influence of currency exchange rates, which have been volatile in recent years.

He said the all-US currency calculation, when applied to Cargill’s wheat buying in Western Canada for the past three seasons, shows that 90 percent of the crop has been bought at a basis of US -$0.85 per bushel to 
-$1.50 per bu., based on a Saskatoon-area point, a range of $0.65.

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However, the basis would have shown a wild range of +$0.40 to +$0.50 per bu. to more than -$2 if it had used a mixed U.S. and Canadian currency conversion, a total range of about $3 per bu.

Russell said Cargill dropped its basis low in the midst of the rail crisis of 2013-14 to discourage deliveries because it couldn’t move the grain. However, it chose not to go “no-bid” because some farmers said they might need to move grain regardless and wanted to have a price to consider.

He said farmers understood a lot more about wheat basis calculating after the meetings, which he hopes makes them feel more confident signing wheat contracts that involve futures or basis components.

If they don’t understand what’s going on with basis, they aren’t likely to use the products, he added.

Contact ed.white@producer.com

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  • ed

    Farmers have every right to be confused about the cons being thrown at them these days like basis and forward contracting by companies such as Cargill and others. Basis is basically like taking a trip in a foreign nation, getting surrounded and jostled around by a bunch of well dressed cute little local children waving stuffed dolls, unicorns and colorful pieces of cardboard while the older kids are picking your pockets and raiding your back packs. Nobody on one side of the situation is suppose to figure it out, and of course the other side wants the victim to remain oblivious to the scam or only understand enough about it to actually limit the liability of the culprits and or maybe even defend the fraudulent process because they were fleece slightly less than their totally unsuspecting comrades. It is a pretty quick study. Most these scenarios are disguised and recycled street crimes. They are old and they work. Arming yourself with a kind of new-era street smarts is your best line of defense and often that won’t be enough. Beware and exercise due situational awareness. Good Luck!

    • Dr

      The word basis, think about it. It is the base or the reason , the thing something is built on. When I was young and in university basis meant freight , elevation and in some cases interest charges. This is what the spot price was built on for each location which was a different facility and distance along a delivery system . Now the “spin doctors” will say ah yes but that is an oversimplification. Back then it was a form of standardization.I say it is just a simplification. Something that needs to be maintained as a standard or a starting point so that the next step can be determined and quantified. Simplification is what farmers do. We eliminate variables . It seems to me that with less grain companies, more powerful rail companies and the government acting like they are one of these companies (bending over backwards to deregulate and facilitate) farmers need more than ever to eliminate variables. It is smoke and mirrors and also divide and conquer . Make some farmers feel smart and others like they don t know what’s going on and it is a blatant lack of respect for primary producers. What else is new?

      The age old problem of farmers being told how it is. The reality is farmers just want to do their job which is growing food. A reminder for all those transporting, marketing , elevating, trading , value adding and yes regulating if it were not for the primary product there would be nothing to transport, elevate ….well you get my point! Less farms means less voice means less power in this day and age where the little guy is getting squeezed out by an industrial / corporate model . Yes a corporate agenda being pandered to by the government.

      • ed

        These companies are like all companies. They operate under the law of profit even if it takes breaking laws to do it. The fact that their widgets are food based commodities that the human population all depends on just makes it extremely dangerous. Humans of coarse are starving to death because of this while some people try in vain to feed them. It can’t and will not happen as these companies have a lock on it. Letting any company that is a for profit only company with non participating shareholders control the earth’s people’s food supply is a great way to break bread with the devil so to speak. It is just not a good idea. The results is clear. Feeding the entire planet has been attainable for a very long time now. Their is no interest and big food companies are at the bottom. They are more interested in cheap labor and instruments to keep commodities cheap and finished products and the necessities of life highly priced and out of reach of many.