Basis confusing but tells story

Wacky wheat bids at prairie elevators will likely stick around, say two crop marketers who deal daily with multiple elevators.

However, farmers shouldn’t get frustrated about basis levels that seem bizarre. Instead, they should learn to stand back and read the submerged but important signals.

These signals vary company to company and don’t relate well to other commodities, but they do reveal what buyers are thinking.

“It’s been kind of a crazy year,” said Brenda Tjaden Lepp of FarmLink Marketing.

As the crop year began there were no bids for wheat, then good demand and tight basis levels after harvest and now wider wheat basis levels again.

Wheat basis levels can differ significantly between elevators that are located side by side, from one region to the next and between elevators operated by the same company. However, they provide clues about how a particular elevator is looking at wheat on any given day.

“It’s a market signal,” said Tjaden Lepp.

“It can be the market saying, ‘I don’t want your wheat.’ ”

Brian Voth, an Agri-Trend marketer in Altona, Man., said elevators in areas where there is good competition and multiple shipping directions tend to have closely inter-related prices, while ones where the grain flows only one direction can see more wide-ranging differences, especially if demand is light.

“If they’re looking to buy, they’ll be fairly close to each other. If they really aren’t, they’ll have a wide basis,” said Voth.

Many farmers in Western Canada have recently been confused and upset by weak and unpredictable basis levels on wheat. The Canadian dollar has been falling and other crops have seemed to respond with relatively better basis levels and aggressive elevator demand, but wheat has not seen the currency improvement end up in farmgate prices.

And when farmers try to assess bids from various elevators and companies, they end up looking at basis levels that don’t make much sense.

Grain companies tend to post spring wheat futures prices and a basis price, but the futures are Minneapolis Grain Exchange prices in U.S. dollars, while the basis is quoted in Canadian dollars.

It means farmers tend to be looking at a futures prices that isn’t in Canadian currency, minus a basis that’s smaller than they’re really paying.

Voth said he thinks the correct way to reflect real commodity price and basis is to convert the U.S. futures into Canadian dollars and put that beside the Canadian-denominated basis.

For example, Paterson does this, but it’s not a common practice. As a result, the grain company’s basis levels appear worse than its competitors, but “their net price is always in line.”

Some farmers have recently speculated that grain companies are deviously capturing more money from farmers by refusing to incorporate exchange rate improvements into better basis, but Tjaden Lepp said that’s probably the wrong way to look at the situation.

The loonie has been falling while the grain companies’ interest in buying wheat has also been falling. They don’t have big wheat sales programs to fill and so are not willing to aggressively bid for it, regardless of Canadian dollar implications.

“Flax prices, pea prices are just screaming higher,” said Tjaden Lepp.

“The wheat market’s really cooled off since fall, and the canola’s just sort of sitting there.”

Bids seem to be a lot better in the United States, which draws further Canadian farmer concern that grain companies are pocketing unduly large amounts of margin on the Canadian side.

However, Voth and Tjaden Lepp said basis levels in Western Canada in the fall were a lot better than in the northern U.S. states and now seem to be settling back because Canadian elevators are selling other crops into export markets.

“Companies seem to have shifted their focus to the smaller crops,” said Tjaden Lepp.

“What we’re missing is enough buyers of wheat to take what farmers want to sell.”

Voth and Tjaden Lepp said most of the weak wheat basis can be explained by lack of grain company interest rather than sneaky foreign exchange tricks, but farmers will always struggle to understand prices when the underlying pricing mechanism is listed in U.S. dollars and the basis in Canadian.

Tjaden Lepp said this confusion would be mitigated if grain companies simply used the ICE Futures Canada contracts rather than the Minneapolis contract.

“Why don’t we politely ask the grain companies why they don’t just switch to ICE futures,” said Tjaden Lepp.

“They all sat down and designed it and now nobody’s using it.”

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