Many farmers who have watched canola futures prices climb in the fall have been scratching their heads over somewhat sluggish cash prices.
As futures prices for November and January contracts rose from levels around $360 per tonne in August to recent levels around $400 per tonne, cash prices failed to rise to the same degree.
The futures price for canola represents its value once it is cleaned and handled through an elevator in the Saskatoon region in a designated future month.
The basis is the difference between the futures price and the value of cash grain.
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Ted Cawkwell, who trucks canola to a crusher near Saskatoon from his farm at Nut Mountain, Sask., doesn’t understand why the basis has stretched as wide as $30.
“We’ve been getting some wacko basis levels out here and we are in the par area,” he said.
At Binscarth, Man., Paul Orsak has seen canola cash levels at $35 to $45 less than futures. Orsak was a dissenting voice on a task force that helped design the Winnipeg Commodity Exchange’s canola contract. He figures competitive basis levels for his area would be $15-$20.
While canola futures rose about $40 per tonne through the fall, basis levels widened by about $10 per tonne, Orsak said.
“On one hand, you’ve got the future price going up, saying there’s higher need for canola and it’s appreciating in value because there’s more demand for it, but on the other hand, the basis is widening out, which gives you the opposite signal,” said Orsak.
“So as a farmer, you’re looking at this situation and saying, ‘Which of these signals is the one I ought to take note of and act on?’ “
Fluctuating basis levels make it hard for farmers to use the futures market to indicate what they should be paid for canola at elevators or from crushers, said Orsak.
While he trades canola futures occasionally to hedge his canola, he said he would use the contract more often if the basis was more predictable.
Larry Martin, a Guelph, Ont. economist who led the task force that designed the canola contract, said a wide basis indicates elevators don’t want canola at the moment. When they want it, the basis will narrow.
“So many people in Western Canada think that basis is just something that you determine by cost, and they’re finally figuring out that sometimes, it’s a price,” he said.
Basis narrows
Traditionally, basis levels widen in the fall, then narrow later on in the crop year.
It’s a situation known as “full carry:” farmers are paid to store their grain, said Bruce Love, marketing director at the Winnipeg Commodity Exchange.
“The market is sending the right signals, and it’s telling the producer, ‘We don’t want the grain now, we want it later, and you know what? We’re willing to pay more for it later, too’,” said Love.
