End User’s Game of Chicken: Negative Basis Levels Continue to Confound

BasisI finished up my wheat harvest today.  It seemed I had a target on the top of my combine cab.  Even today it rained.  So I think that means that next year we will have a long dry period and wheat harvest will be over in about two days.   So after I took my last loads to the elevator, I had a long discussion with some producers about basis levels for grains.  Of course that discussion came after one producer told me he was holding out for $5.25 for his wheat.   The cash price today at the elevator was $5.01.  Three weeks ago it was $3.77/bushel.  There is nothing like a dollar and a half futures rise to change attitudes.

The $5 price of wheat spawned discussions surrounding the negative basis levels for all grains in Ontario.  If you are one of my American readers, you would be very used to a negative basis but in Ontario, Quebec and other places across Canada producers until the last couple of years have been more used to high positive basis levels for grains.  So while many producers today at the elevator discussed their marketing plans, I asked the question what if the Canadian dollar goes back down to $.75 US?

The retort came to me this way.  Phil, it doesn’t seem the value of the Canadian dollar is having the effect it once did, what’s up with that?  Of course with the Canadian dollar hovering around the $.96 level I knew what he meant.  The Canadian dollar has been at this level for some time now and a movement within a four-cent range doesn’t seem to have much of an impact on basis levels.  I retorted back that the Canadian dollar in March 2009 closed at $.7749 US.  If it was to do that again, we’d gave huge positive basis levels for Ontario grains.  Of course at that point, price imaginations were going wild, and I said we just never know.

The simple truth is the value of the Canadian dollar lives in the psyche of most all Canadian farmers.  We are ingrained with the knowledge that the value of the loonie is significant in a major way on the price impact of almost every major agricultural commodity in Canada.  It is this way because most major agricultural commodities are priced in US dollars and about 80% of what Canada produces is exported to the United States.  Add in the fact that replacement value on Canadian grains especially in eastern Canada is always measured against importing it from the United States.  Any grain bought from the United States is paid in US dollars and so as the loonie goes, so goes our farm prices in Canada.

The loonie’s value gets mixed up into what basis really is when it comes to determining the value of Canadian grain.  For instance if you could imagine for a moment that we had a common currency between the United States and Canada, basis levels would be much easier for some to understand.  In that case basis levels would almost always be negative, taking into consideration the distance to the Chicago market or a warehouse deemed a delivery point by the CME.  At the end of the day, “basis values” reflect the true value represented in price which grain is moving at.  It just so happens that in Canada those values are in Canadian dollars.

Going further, “basis levels” are not only a value at which grain is moving, but also a true reflection of how acute grain is needed by ultimate end-users.  That’s what I was trying to emphasize to my farming colleagues today at the elevator roundtable.  For instance, as of today, Ontario corn end users can see an almost record crop in the fields.  They see no reason to raise basis levels; in fact, they probably see reasons to lower them.  Ditto for Ontario soybeans as well as Ontario wheat.   In the case of Ontario wheat, the question has to be asked are end-users willing to pay more than five dollars?  Why should they?  Wheat is everywhere at the moment!

It has almost led me to believe, that at least for some agricultural commodities, “basis” is a bit of a “state of mind.”  It’s almost like a game of chicken, end users constantly pulling down basis levels and only raising them when they absolutely have to.  It helps when you can fit end-users within a market in a minivan versus a motorcycle.

I was always maintained that it’s more important to “seize the day” and capture a cash price, which you are comfortable with.   Often, that puts the Canadian producer in a tough position as cash price movement always has a fickle basis.  The point is, “get over it”.  Negative basis levels are a true reflection of what our prices are.  Will they stay that way?  No, but it will take the Canadian dollar dropping precipitously to move it into positive territory.   In the meantime, our challenge is to plan accordingly and take advantage of those surprise-marketing opportunities like $5 Ontario wheat.  Surprises