“Earlier in 2015, wheat basis levels became a hot topic because of the lower Canadian dollar,” says Todd Bergen-Henengouwen, market analyst, agricultural inputs, Alberta Agriculture and Forestry (AF), Edmonton. “Continued weakness of the loonie throughout the year has kept this issue relevant into the fall of 2015.”
Basis is calculated as the difference between the cash market price and the relevant futures price. Spring wheat futures, as traded on the Minneapolis Grain Exchange (MGEX), are generally used as the reference futures price for hard red spring wheat. When this price is deducted from the elevator cash price, the result is the “basis” as quoted by most grain companies operating in Canada. “It is important to remember that MGEX futures are traded in U.S. dollars, so to calculate the basis; one should convert either the futures price to Canadian dollars or the local cash price to U.S. dollars,” says Bergen-Henengouwen. “This way, the basis can be measured in U.S. or Canadian dollars.”
Since each individual buyer sets basis levels, many producers monitor basis levels as a way to gauge how much the elevator wants their grain. Grain companies offer contracts that allow producers to lock in just the basis level and later lock in the related futures price. So, upon signing a basis contract, the price that the producer will receive depends on the futures price. For example, if a producer signs a basis only contract at a value of $0.50 per bushel OVER and later chooses to settle on a futures price at $5.00 per bushel, the producer would receive $5.50 per bushel for the grain. The contracted basis of $0.50 per bushel would remain the same regardless of any market forces that could affect it during the span of the contract.
“Understanding how wheat basis is reported is important for producers to understand before they enter contracts,” says Bergen-Henengouwen. “Some key questions to ask are: What currency is the basis in - Canadian dollars or U.S. dollars? When the basis contract is settled against a futures position, is the contracted basis applied directly to the U.S. denominated futures, or is it applied after the U.S. denominated futures is converted to Canadian dollars? In other words, from the time that basis contract was signed, does a change in the Canadian dollar exchange rate also affect the final price, or is the U.S. futures price the only factor that can affect the final cash price?”
Source : Agriculture and Forestry