Grain companies are doing little for price transparency, or their own reputations, in the way they display bids for wheat on their websites.
The textbook explanation of a cash price is the futures minus the basis.
In canola, this is displayed simply and clearly on grain company websites.
They display the ICE Futures Canada canola futures contract price and the company’s basis. Through simple arithmetic — futures minus basis — a cash price is determined.
Basis is supposed to account for the cost of transportation, storage, interest, cleaning, weighing and inspection, terminal charges and the grain company profit margin.
Read Also
Food vs. fuel debate simmers in the background
The OECD/FAO are forecasting that 27% of the global cereals crop will go to biofuels and other industrial purposes by 2034.
It also has a component that reflects the buyer’s demand. If the buyer has an urgent need for grain to fill an order, the basis narrows and sometimes even becomes positive.
If the buyer has no orders to fill and does not want to clutter up its elevator with grain it does not need, then the basis widens.
But where is currency exchange fluctuation reflected?
That is the problem in the Canadian wheat market.
Take hard red spring wheat. Canadian grain companies use the Minneapolis Grain Exchange hard red spring contract as their starting point.
It trades in U.S currency.
Many grain companies operating in Canada display the U.S. MGEX price in U.S. dollars, subtract a basis in Canadian dollars and display a cash price in Canadian dollars.
So for an elevator in Moose Jaw, this is the bid for January delivery of No. 2 Canadian Western Red Spring wheat, 13 percent protein in bushels: MGEX March US$5.69. Basis -30 cents Canadian. Cash price C$5.39.
The math looks correct at first blush, but then you remember that the MGEX is in U.S. dollars.
That US$5.69 is worth about C$7.06.
So if the cash price is C$5.39, then the difference is more like $1.66, not 30 cents.
At the website of another grain company, the bid for No. 1 CWRS 13.5 percent protein at an elevator in central Saskatchewan leaves out the MGEX price and simply states its basis is -C$13 a tonne, or -35 cents a bushel for a net price of $196.07, or $5.34 a bu.
Again, the basis bears no resemblance to the actual difference between the futures and cash, adjusted for currency.
Just south of the border at Berthold Farmers Elevator in Berthold, North Dakota, the website paints a much clearer picture, relying on simple arithmetic. It posts a basis of -US50 cents from the futures of $5.69 to arrive at a cash price of $5.19.
Converted to Canadian dollars, that’s a basis of -62 cents and a cash price of $6.43 per bu., or more than $1 more than the Canadian elevators.
A suspicious mind would say the Canadian grain companies are trying to hide something, such as an outrageous profit margin and failure of the arbitrage that was supposed to balance Canadian and American grain prices following the end of the CWB monopoly.
It is a similar situation in Canadian Prairie Spring wheat, which uses the Chicago wheat contract as its starting point, and winter wheat, which uses the Kansas City contract.
There must be more clarity on how Canadian wheat buyers factor foreign exchange into their pricing so that their real basis becomes clear.
This would not be an issue if the ICE Futures Canada milling wheat contract, which is priced in Canadian dollars per tonne, had gained traction. The contract exists, but there is no trade.
Making a new contract work isn’t easy. Those pioneering it would face a lot of risk as long as volume is small and liquidity is inadequate.
However, grain companies didn’t even try to make it work.
They stayed with the relative safe bet. MGEX spring wheat is established and has volume, but even it sometimes lacks adequate liquidity.
For now, MGEX remains the de facto North American hard spring wheat price setter.
And so grain companies operating in Canada must come up with a way to present honestly and transparently how their cash bids in Canadian currency relate to the MGEX futures.
Contact darce.mcmillan@producer.com
