What is a basis?
Calculating basis is very simple, understanding and interpreting it is not as easy. However, understanding basis and the things that influence it, can help clarify the question “Is this a fair price for today.”
Basis is the cash price that is posted at any location; crusher, elevator etc, minus the futures price.
Every single buyer location has a different cash price, and because the basis is the cash minus the futures price each price has its own basis. To get started with understanding basis let’s look at cash prices and futures prices.
This a graph of the nearby canola futures prices and the cash price of canola near Saskatoon, which is where the ICE Canada canola futures contract is based off of. As you can see, cash prices and futures prices move closely together over time. But you can also see that they don’t move penny for penny either. There is some variability in the difference between the two.
However, cash prices and futures do not walk completely in lock step. The graph below has the exact same information as the previous one, except that it is the difference between the two prices. In other words, it’s the cash price minus the futures price, or the basis. You can see that the difference tends to gravitate mostly between even money and $30/MT under. Ignoring a couple of the odd spikes to the upside. A higher value means that the cash price is relatively stronger than the futures price. We will cover off the reasons for the differences later.
This graph has the same information as the previous graph, except this time it is mapped out by crop year. There is a general tendency for basis levels to be weaker during the fall harvest period, and strengthen later in the crop year. This makes sense, since there is a lot of grain that comes into the system in the fall, and so cash markets will tend to be relatively weaker in response, while supplies tend to tighten up as you move into the later winter and spring.