If we have some sense of what basis levels are doing in Vancouver, then we can better determine whether an exporter has some room to move in the basis level they are showing to farmers when trying to buy their canola. We can see if it truly is a good deal. When we know the math, we can get some sense as to how often a company has the extra “cushion” that allows them to be more competitive in trying to buy canola if they need to be, and if there is some room to move on that basis level before they start to forfeit their margin.
A basis also reflects what a company is able to sell the sell grain for into the next market, less the cost of getting it to that market. So lets start by understanding what goes into the cost of getting grain to the end market.
Let’s look an example. If we assume that an exporter can make a sale of canola delivered into China at a price of $445 USD. If ocean freight is $16/MT, then the value of that canola is $429 USD loaded onto the boat in Vancouver.
If the loonie has a value of 75 cents, this canola is worth $567/MT Canadian. If the futures price that they hedge this sale against is $516/MT then the freight on board Vancouver basis is +$61/MT.
So what does that plus $61 basis mean to the bid that a farmer sees? We need to continue to back off the costs.
- Elevation costs at the terminal
- In and out inspection
- Rail freight from the country elevator
- Cleaning and elevation at the elevator
- The cost of storage and interest
In total it could be $65 of costs. For this example, the elevator would need to have a basis level of at least $5 under the futures price or weaker if they want to buy canola and make a margin on this sale. If they can buy it cheaper, then they can add a bit to their margin. If they have to pay more for the canola, then they are cutting into their margins, or operating at a loss. That said, basis levels in Vancouver aren’t static either, so a basis of $5 under is fair when basis are $61 over in Vancouver. Similarly, if basis levels in Vancouver are only $40 over, then a country basis level can be down to $25 under the futures price and still be fair.