Source: Alberta Agriculture and Forestry
Following basis can give clues of what is happening in the market and provide pricing opportunity.
‘Canola producers, particularly those with canola in storage, follow canola cash prices,’ says Neil Blue, provincial crops market analyst with Alberta Agriculture, Forestry and Rural Economic Development. ‘However, not all canola producers track the difference between the cash price and the futures price for canola. That difference is termed “basis”. Following basis can give clues of what is happening in the market and provide pricing opportunity.’
The basis is found by subtracting the futures price from a cash price. For example, in this historically strong canola market, one canola buyer’s March delivery cash price is $1028/tonne. The March canola futures is at $1021/tonne. Cash price of $1028 minus futures price of $1021 equals +$7/tonne March basis.
‘Sometimes this is referred to as an “over” basis, specifically $7 over the March futures,’ explains Blue. ‘Other buyers set their basis level according to how aggressively they need to attract delivery commitments from producers. When considering a basis quote, it is important to know which futures month is being referred to. Note that all buyers will not necessarily reference the same futures month for their basis quote for a specific delivery month.’
To analyze basis, one should know some basis history for that commodity. For canola, basis levels range from a weak minus $80 (or cash price $80/tonne discount to a futures price) to a strong plus $80 (or cash price $80/tonne premium to a futures price). Canola basis levels can even be outside of this range.
‘Recent marketing year basis levels are also relevant to current basis analysis, and so are seasonal basis trends. Basis is a reflection of “local” supply and demand in a market, so canola basis levels tend to be weakest at harvest when there is usually plenty of supply relative to demand. As the marketing year progresses, supplies tend to tighten relative to demand and that situation often results in stronger basis levels into spring. This year, with drought-reduced canola supplies and strong vegoil prices, price and basis volatility tend to be high.’
Blue points out canola trade is a margin business, so buyers will only pay high enough to obtain needed supplies. Lately, as canola futures prices have risen to new highs, many buyers have weakened their nearby basis levels.
‘That may indicate that buyers are closer to contracting their near-term needs or perhaps just not passing on the entire higher futures price in their cash bids. However, the deferred old crop basis levels have not changed much.’
With the futures market in a strong inverse with higher futures for nearby months relative to deferred months, buyers are applying a stronger basis to the deferred old crop delivery months to keep those cash prices competitive with nearby cash prices.
‘For producers holding on to some canola waiting for an even more spectacular price, here is a strategy to consider,’ says Blue. ‘Like last year, as time passes to the next canola futures month, those prices have risen to approach the previous futures month’s high. If that trend continues, consider contracting some of the stronger basis level for a later old crop month and leave the futures aspect of price open.
If that deferred futures price rises as time passes and buyers also weaken those basis levels, you can take advantage of the higher futures price with your basis locked in at a stronger level. There are cautions. First, know the deadline that the buyer sets for pricing the basis contract against the futures. Second, ensure that your canola will remain in good condition during storage; and third, in this high priced canola market, almost anything can happen,’ says Blue.
For more information, contact Neil Blue: