Toolbox
Farmers
PPO and basis commentary
December commentary
2009-10 FlexPro
Current wheat prices have declined since the last PRO. This has resulted in weaker FlexPro prices.
PPO prices have also been impacted by a reduction in the risk discount required to operate these programs. Over the past month more of the 2009-10 crop has been marketed, which reduces some of the uncertainty that previously existed.
2009-10 FlexPro - Monthly Changes
|
CWRS |
CWHW |
CWES |
CWRW |
CPSR |
CPSW |
CWSWS |
26-Nov |
$244.03 |
$244.03 |
$214.03 |
$195.10 |
$200.03 |
$198.03 |
$170.08 |
17-Dec |
$232.68 |
$232.68 |
$202.68 |
$177.65 |
$183.20 |
$181.20 |
$156.96 |
Change |
-$11.35 |
-$11.35 |
-$11.35 |
-$17.45 |
-$16.83 |
-$16.83 |
-$13.12 |
Basis Commentary
The basis is calculated using the simple difference between the FlexPro and a particular futures contract such as. Minneapolis March 2010. The FlexPro is determined by the current values that the CWB can sell which is affected by both U.S. and international prices, while a particular futures contract can be influenced by a different set of factors. As a result, some volatility is expected in the basis level.
Basis = FlexPro - Futures
For example over the past month, the FlexPro for CWRS decreased by $11.35 and the Minneapolis March Futures decreased by $13.86.
Basis Change = -$8.44 - -$13.86
Basis Change = $2.53
Over the past month basis values were mixed as the CWRS FlexPro did not drop as fast as the U.S. futures markets. The basis improved by between $2.53 and $5.29 per tonne with the greatest improvement being in CWSWS as the Chicago market declined relative to the FlexPro for CWSWS. The basis was lower for the CWRW and CPS classes as the FlexPro dropped faster than the U.S. futures market.
2009-10 BPC March Basis - Monthly Changes
|
CWRS |
CWHW |
CWES |
CWRW |
CPSR |
CPSW |
CWSWS |
26-Nov |
$21.82 |
$21.82 |
-$8.18 |
-$24.10 |
-$19.17 |
-$21.17 |
-$52.43 |
17-Dec |
$24.35 |
$24.35 |
-$5.65 |
-$25.07 |
-$19.52 |
-$21.52 |
-$47.14 |
Change |
$2.53 |
$2.53 |
$2.53 |
-$0.98 |
-$0.36 |
-$0.36 |
$5.29 |
Important market factors
- The USDA increased its 2009 world wheat production estimate to 674 million tonnes and now forecasts world wheat stocks will build by 27 million tonnes this year. The USDA increased Canadian production to 26.5 MT, which is in line with Statistics Canada estimates. It also decreased Australian wheat production 1 MT to 22.5 MT.
- U.S. wheat futures have decreased between 36 and 41 cents since the November update. Speculative fund activity, which was largely responsible for the rally in November, has declined in the past weeks and is providing diminished support for wheat futures.
- World currency relationships remain volatile which continues to impact grain prices. The US dollar has strengthened against most major currencies, in response to positive economic indicators surrounding the recovery and growth of the U.S. economy. The stronger US dollar has a negative impact on agriculture commodity prices.
- In the U.S., the soybean harvest is now complete and the corn harvest is 92-per-cent complete, compared to 100-per-cent normally.
- Farmers have faced challenging harvest conditions in Argentina and Brazil. Rainfall delayed harvest progress and affected the quality of grain in these regions. These events continue to provide some support to the market and will increase the region’s import demand.
- Large global wheat supplies have decreased import demand in the first half of the crop year. The U.S. has sold 66 per cent of the USDA export forecast of 23.8 million tonnes in 2009-10, compared to 78 per cent normally. The EU has sold about 36 per cent of the IGC export forecast of 18 MT for 2009-10, which is in line with the 37 per cent sold at this time last year. Russia has now sold 30 per cent of the IGC wheat export forecast of 19 MT, compared to 48 per cent at this time last year. Global wheat trade is expected to pick up in the second half of the crop year once importing countries have worked through some of their domestic supplies.
Basis
The basis on a CWB Basis Price Contract (BPC) is the difference between the Fixed Price Contract (FPC) and the specific futures contract used in the BPC.
BPC Basis = FPC – relevant futures price
The BPC basis level is influenced by many of the same factors that influence other basis levels including the reference to a relevant futures price, margins for risk, financing costs, administration costs, etc.
A significant difference between the BPC basis and other types of basis such as a U.S. spot basis, is the match between the delivery period and the specific futures maturity. Because the CWB accepts deliveries and markets grain for a full pool year, the FPC is based on prices projected to be available until the close of the pool year. This results in an FPC price that includes the impact of the current carry or inverse in the market. As a result, the basis level against a specific futures maturity is also affected by the market structure of the remaining marketing year.
The most regular source of daily variation in the BPC Basis relates to changes in the overall futures market structure. If the difference in futures values are such that there is a positive gain in the futures price between two successive delivery months, then a “carry” exists in the market, conversely if the price declines then an “inverse” exists in the market.
If the change in the overall futures structure is such that the carry becomes larger, then the BPC basis will become more positive to farmers. If the change in futures structure is such that the carry becomes smaller or an inverse develops, then the change in the BPC basis is such that it becomes less positive.
As other market factors change, the daily BPC basis value will be adjusted to incorporate them.
