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“Basis for agricultural commodities that are associated with a futures market is the difference between a cash price and a futures price,” says Neil Blue, provincial crops market analyst with the Alberta government. “Specifically, basis is calculated as ‘cash price minus futures price.’”
When the result of that calculation is positive, with the cash price higher than the futures price, that is referred to as an ‘over’ basis. In that case, an example basis quote is ‘$5 over the March futures’. When the calculation results in a negative number, with the cash price less than the futures price, that is referred to as an ‘under’ basis. An example basis quote in that case is ‘$8 under the March futures’.
The basis for crops contains costs of a difference between the cash and futures markets for crop location and costs involved in handling and storing the commodity. Basis can include freight, elevation, cleaning, storage, risk and interest during the holding period. Basis also includes the buyer’s profit in dealing with a commodity.
Basis for futures-related commodities is the way that buyers signal their eagerness to acquire a commodity, strengthening their basis relative to the futures price when they want to contract more of a product, and weakening their basis when they are less interested in contracting that product.
“The basis for canola is easy to understand because the canola futures contract price is in Canadian dollars,” explains Blue.
For example, a current cash price bid by a canola buyer for January 2023 delivery is $860/tonne with the January futures at $840/tonne. Using the formula cash price minus futures price results in a basis of plus $20/tonne, or $20 over the January futures.
The basis levels for wheat are more difficult to interpret since the U.S. wheat futures prices are in U.S. dollars. There is a new Vancouver-based hard red spring wheat futures contract provided by the CME Group, but it is also denominated in U.S. dollars. Most grain companies are quoting wheat basis as ’Canadian cash price minus U.S. futures price’. The exchange rate is contained within the basis.
“That method is simple to calculate, but difficult to interpret,” points out Blue. “Some grain companies, in calculating the wheat basis, first convert the U.S. wheat futures price to Canadian dollars to use in the formula. That method is the standard used for calculating basis levels for the livestock markets of cattle and hogs.”
Example of the wheat basis calculation (for January delivery):
|December 6, 2022 Alberta grain company hard red spring wheat cash bid $430/tonne|
|Minneapolis Grain Exchange March hard red spring wheat futures ($8.96 U.S./bushel)|
|$8.96 U.S./bushel X 36.743 bushels/tonne/0.7332 exchange rate = $449/tonne|
|Basis of that grain company $(19)/tonne or negative $19/tonne|
A source of general basis levels for Hard Red Spring wheat and Canada Prairie Spring wheat is the website for PDQ (price and data quotes) administered by the Alberta Wheat and Barley Commission. The wheat prices and basis levels available on this site provided by the Western Grain Elevators Association represent an average from numerous grain companies within a region and use the ‘Canadian cash minus U.S. futures price’ method of basis expression.
“Although the wheat basis levels provided on the PDQ are general and expressed with the method of including the Canadian dollar exchange rate (Canadian cash price minus U.S. futures price), the historical price and basis data available give an indication of basis ranges over time. Most of the time the Canadian dollar is discount to the U.S. dollar, resulting in a positive basis. The basis range over the past several years using that calculation method has ranged from positive $8/tonne to positive $105/tonne, with an average of positive $50/tonne,” explains Blue.
Connect with Neil Blue for more information.
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