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.

“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.

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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