What is GFO doing about the basis?

PROVIDING ANSWERS TO A COMMONLY ASKED QUESTION

AS LOCAL GRAIN prices struggle to keep up with the pace set at the Chicago futures exchange, not surprisingly ‘the basis’ is a hot button issue commonly raised by GFO members.

Rather than being a single issue, basis levels are the result of a number of separate issues, some of which are beyond anyone’s control, such as currency valuations.

However, GFO is determined to do everything within its power to achieve the most fundamental objective of improving prices paid to Ontario producers.  This goal is the motivation for many of the organization’s activities. Below is a list of the different factors which determine basis levels and what GFO is doing to help.

ontario isn’t unique
In the past few years, basis levels have widened across the US and around the world. This is due to both the increased cost of transport and storage and also a deterioration of the relationship between the cash and futures market. The persistently low basis has raised concerns that futures markets are not operating efficiently due to a lack of information or an increased level of speculation.  As a result the futures exchange is becoming less useful as a risk management tool.

what growers can do
In this new market reality, growers need to arm themselves with as many marketing options as possible.  We know that basis will usually deteriorate at harvest. Therefore on-farm storage can be a smart investment to avoid selling into harvest lows. Similarly, growers should be prepared to forward sell when attractive prices are on offer.

The age old advice of knowing your cost of production and establishing a marketing plan is more relevant than ever. Marketing is now a year-round task for farm business. If growers do not have the skills or time to dedicate to the task, there are outsourcing options available.  

It’s also important for growers to acknowledge when healthy prices are on offer in the local market. Waiting to hit a home run can result in missed opportunities and disappointment.

GFO staff and directors are always available to discuss this issue with members. •

Basis influence What’s GFO doing?
Currency movements • beyond GFO’s control
Speculation and volatility in futures exchanges • beyond GFO’s control
Local demand • Lobbying to improve ethanol/biodiesel mandates
• Funding research to improve market opportunities. eg. crop breeding
• Partnering with industry to develop new uses for Ontario grain
Export demand • Promoting Ontario grains and oilseeds to the world, through trade shows, branding and other forms of marketing
• Addressing food safety, trade and market access issues to improve the competitiveness of Ontario grain on the export market
Competition and harvest pressure • GFO retains a presence in the Ontario wheat market to ensure strong competition among buyers and to remove harvest basis pressure, via the pooling program
• GFO continues to fund John Jordan’s Farm Market News service, to improve price transparency and promote competition. Information is available to growers via GFO’s website, a daily email and a newly developed Blackberry application
• Encouraging new entrants into the Ontario market.
Transport and storage costs • Lobbying government to improve the efficiency of grain transport infrastructure (i.e. road, rail, port)
• Encouraging the development of more grain storage in Ontario (on and off farm)
About Seamus Hoban 4 Articles
Economist, Grain Farmers of Ontario