Some farmers and marketing advisers are wondering what’s going on in the wake of the substantial negative basis levels that have developed in some Canadian Wheat Board producer payment options contracts.
“The wheat basis level is getting progressively worse,” said Lee Melvill, a marketing specialist with Alberta Agriculture.
That’s been a surprise, he said, because previously, a pattern seemed to have developed in which basis levels improved over the course of a crop year. That changed this summer.
“There’s no correlation year to year,” said Melvill.
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The basis levels apply in the wheat board’s fixed price contract and basis payment contract.
Unlike the relatively simple grain company basis levels, which are a combination of transportation charges and desire for grain at a particular point, the wheat board basis is a longer-term calculation.
According to the board, it is an estimate of cash prices for board sales
minus estimated futures prices over the same period.
The forecast futures price is the estimated average price of futures in wheat board wheat markets around the world over the 18 months that pool accounts are open.
Usually it has been a good idea for producers to wait to lock in their basis until later in the crop year because the basis improved, but this year the levels have gotten worse.
That has left egg on the faces of advisers who suggested farmer clients wait to price the basis, which many did this year.
But those who priced the basis early under the basis payment contract and didn’t price the futures until now have been fortunate. They locked in the best basis levels available so far while getting a chance to leap on skyrocketing wheat futures prices.
Advisers across the Prairies have been surprised by the sudden negative swing of the basis, recently more than $6 under, because it runs counter to the pattern of the last seven years of the producer pricing options program.
But board sources say the options program has been in existence for too short a time for anyone to suggest it shows permanent pricing patterns. This year demonstrates that.
While futures prices have shot higher in recent months, world cash prices are moving far more slowly upward. The Canadian dollar has also risen relative to the U.S. dollar, which had an impact, the board said.
Melvill, like many advisers, is hoping to get a clearer sense of how the board arrives at its contract basis levels, because many farmers are confused.
“We’ve had wheat board people sit down and explain it to us and we thought we understood it,” said Melvill.
“But with the things that have happened to basis levels at the tail end of last year and this year, all of a sudden we don’t believe we understand it again.”
