Basis levels have come closer to the traditional range recently, but canola growers still feel burned by last fall’s wide basis and their inability to capture price increases they saw in futures prices.
“I don’t think the canola contract is working all that well,” said Bruce Dalgarno, a Manitoba Canola Growers Association director.
“It’s not transparent enough to give producers an idea what the price is going to do at their local elevator.”
Producers who watched canola futures prices rise in the fall were chagrined to find basis levels at local elevators widen at about the same rate.
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At one point farmers in Manitoba found the canola basis had widened to $60-under from the average level of $35-under.
Farmers and analysts are now trying to determine whether the problem lies in the commercial market or with the Winnipeg Commodity Exchange’s canola contract, or whether there’s a problem at all.
Analyst Brenda Tjaden Lepp of Mercantile Consulting Venture thinks grain company actions in the early fall disrupted the grain handling system, but then flaws in the canola contract turned a short-term commercial problem into a contract problem.
Since the big elevator companies didn’t want to plug their collection systems by buying cash grain to deliver against the November contract, they didn’t encourage canola deliveries with improved basis levels, even if acting could have produced a quick financial gain, Tjaden Lepp said. And since there were no other major players able to take advantage of the gulf between futures and cash prices, the gain was left on the table and cash and futures prices didn’t converge.
For a contract to work effectively, it has to be seen by users as a credible reflection of the underlying cash market. When convergence doesn’t occur, the contract credibility weakens.
“I’m concerned that we didn’t get convergence,” said Dalgarno.
Tjaden Lepp thinks this year’s confusing canola basis situation reveals that the Winnipeg exchange needs to expand the number of players that can deliver against its contracts.
If small grain companies or farmers who own old grain elevators could more easily use the contract’s delivery mechanism, convergence would be more likely.
“If they (small players) could deliver, they would deliver,” said Tjaden Lepp.
The problem is the exchange’s high financial requirements to deliver against the futures contract.
Dalgarno said his organization had meetings with the commodity exchange, grain companies and crushers, and has concluded that there was no plot to rob farmers in the autumn.
“There weren’t any one or two things causing it,” Dalgarno said. “It was a whole lot of things.”
Canola industry analyst Nolita Clyde of Ag Commodity Research said the basis situation after harvest was unusual, but shouldn’t preoccupy farmers.
“I think the whole basis thing is a red herring for people,” said Clyde. “Your basis is only a small part of your overall canola price. You have to look at the bottom line.”
But Tjaden Lepp said farmers have a right to be angry if the cash or futures markets are sending contradictory signals. The grain industry needs to ensure farmers have clear market signals if it wants to encourage their participation.
“There needs to be a change,” said Tjaden Lepp.
