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Basis Signals for Canada's Canola Marketers

29 May 2013
Alberta Agriculture, Food and Rural Development

CANADA - Canola producers, particularly those with canola in storage, follow canola cash prices closely. However, not all canola producers track the difference between the cash price and the futures price for canola. This difference is termed ‘basis’. Following basis can often give clues of what is happening in the market.

“The daily or ‘spot’ basis is found by subtracting the nearby futures price from a daily cash price,” says Neil Blue, market specialist with Alberta Agriculture and Rural Development. “For example, in the strong price market of May 2013, one canola buyer’s local cash price is C$656/tonne. The nearby July canola future is at C$645/tonne. Cash price of C$656 minus futures price of C$645 equals +C$11/tonne spot basis. Sometimes this is referred to as an ‘over’ basis, specifically C$11 over the July futures.

“A deferred delivery basis is calculated in a similar way, except that the deferred cash and deferred futures prices are used in the calculation. Currently, basis levels for fall 2013 delivery are around C$0 to -C$15, that is par with to C$15 under November futures. When referring to basis, it is important to always know which futures month is being referred to. Each buyer will not necessarily reference the same futures month for their basis quote for a specific delivery date.”

To analyze basis, one needs to know some basis history for that commodity. For canola, basis levels range from a weak minus C$50 (or cash price C$50/tonne discount to a futures price) to a strong plus C$25 (or cash price C$25/tonne premium to a futures price). Sometimes, canola basis levels can even be outside of this range.

Recent marketing year basis levels are also relevant to 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 usually results in stronger basis levels into spring.

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