Basis U.S. experience suggests farmers will be in for dramatic fluctuations, and may want to store more grain
THE OPEN MARKET:
Good for bin salesmen
Buy or lease bins. That was the advice given to farmers attending the recent Farming for Profit conference who are wondering how to manage the increased risk that comes with an open market for wheat, durum and barley.
“Storage will be king,” Moose Jaw farmer Vaughn Cone told the event organized by University of Florida agricultural economist Andy Schmitz.
“It’s about when they (grain companies) are going to need our grain, not when we want to deliver it. And if you want to deliver it when they don’t need it, be prepared.”
Cone, who farms 8,000 acres, said he is leasing another four 25,000-bushel bins.
Increased delivery flexibility was one of the advantages touted by open-market supporters for killing the Canadian Wheat Board’s monopoly. Agriculture Minister Gerry Ritz said farmers wouldn’t have to start their trucks and augers during the bitter cold in January. There will be flexibility, but in an open market prices will signal when farmers should deliver, said Frayne Olson, an agricultural economist at North Dakota State University. Grain companies typically use the basis — the difference between the cash and futures price — to encourage or discourage deliveries, he said.
Usually the basis is widest, resulting in a lower price to the farmer, at harvest time when elevator companies are flooded with grain, he said. They are the narrowest in the middle of winter when deliveries are reduced.
Since 2007, world grain markets have become much more volatile and so has the fluctuation in basis, Olson said. Before 2007, the wheat basis in North Dakota ranged from 30 cents a bushel under the futures price to 10 cents over for a 40-cent spread. Now the spread can be as much as $3. Being able to store grain when the basis is wide is one of the simplest ways of dealing with the risk, he said.
“In the last few years the market has paid you substantial rewards for being careful about watching that spread in the cash and futures,” Olson said.
Some of the grain contracts in the U.S. give the buyer the right to determine when the grain is delivered.
“You don’t deliver when you want to — you deliver whenever the buyer wants it,” he said. “And that could be two weeks from now or two months from now. It could be 12 months from now.”
Using futures and options markets is another way to offset price risk, but it’s important to know the difference between hedging (locking in a grain price) and speculating (gambling prices will go a certain direction), Olson said.
The Minneapolis wheat futures market matches most closely the type of wheat grown in Western Canada, he said. There’s not enough trading on ICE Future’s Winnipeg market, he said.
An open market is a big change for Western Canadian farmers, said Dan Hawkins of FarmLink Marketing Solutions.
“We’ll have to be patient for markets,” he said.
Sometimes buyers will want a No. 3 wheat, not a No. 1 and vice versa.
“We have to sell into the strengths when the strengths come,” he said.
It’s going to be different for grain buyers, too.
“I had one buyer tell me that his trading area would triple in size because instead of knowing just what durum and wheat samples were in a 50-mile radius of his elevator he now needed to know within a hundred miles,” Hawkins said.