By Patrick Meagher
KEMPTVILLE — Western Ontario agricultural economist Phil Shaw had a message for Eastern Ontario crop farmers: You’ve got an edge on Western Ontario thanks to the basis price.
Speaking at the Eastern Ontario Crop conference in Kemptville on Feb. 12 he told farmers to remember every time they sell corn, they’re getting a better price than what he gets near Chatham because the farther east you travel, the better the basis. True, but the cost to Eastern Ontario farmers to get to the elevator is often higher because they have farther to travel.
Nevertheless, a strong basis price can mean a Winchester-area producer can earn $1 more per bushel of corn than the guy in Chatham. That can really add up if you’re hauling in 170 bushels an acre. In others words, Eastern Ontario has gotta love the basis.
Anyone selling commodities knows about basis. But not everyone understands it. Shaw describes basis as “the value which determines when grain is moved, bought or sold.”
To a young farmer that might seem as clear as mud. I feel your pain. It took me years to figure out the basis because it seemed that everyone describes it differently. Here’s how it has been explained to me.
“Basis is transportation cost.”
“It’s the cost of storage and exchange rate.”
“Basically, you get rewarded the closer you are to a waterway.”
Or as Steve Kell, at Parrish and Heimbecker, once kindly noted, “Basis is a complicated beast.”
Ask a bunch of farmers to explain the basis and you get a bunch of different answers and two invitations to dinner. Here’s the simplest way I know to look at the basis. In today’s world, the basis is good, increasing the price you get for your crop.
The basis acts as a price corrector, factoring in local differences. Probably the most significant differences that make up the basis price in Eastern Ontario are local demand, lower transportation costs and the U.S. exchange rate. Often, all three factors will increase your basis, and therefore, the money you put into your pocket. For example, on Feb. 13 the correction or the basis price at North Gower Grains was $1.10 per bushel of old crop corn. That raised the cash price of corn by $1.10, from $3.79 per bushel to $4.89/bu. Southwestern Ontario producers also benefited from a high basis price but not quite as high as in Eastern Ontario, where the basis helped farmers earn an extra 10 cents per bushel.
That same day, the basis price for soybeans was an extra $2.10 per bushel, bringing cash price to $11.27.
Here are the local differences in more detail starting with local demand. Eastern Ontario farmers are fortunate that there is often more competition to buy local corn than in Southwestern Ontario (and the U.S.) where production is higher and it can sometimes seem like there are grain elevators every 15-minute drive. Eastern Ontario has many customers who are livestock producers and some big local buyers for corn including Ingredion, at Cardinal, and Greenfield Ethanol, at Johnstown. This can translate to a higher price for a commodity. That premium price becomes part of the basis price.
Transportation costs are lower for Eastern Ontario producers because of that local demand. Corn and soybeans also don’t have as far to go when filling international contracts. Waterway ports, such as Johnstown and Sorel in Montreal, are close. The commodity doesn’t need to first wind its way across the country because it’s heading out to sea.
The exchange rate is a huge factor in the basis price. Commodity prices are listed in U.S. currency (by the Chicago Board of Trade). When the Canadian dollar is weak the basis price goes up to correct the difference in the currencies. With a weak Canadian dollar (hovering around U.S. 75 cents in February), the exchange rate correction is a huge benefit to local growers and can mean the difference between a profit or loss.
To sum up, the basis price includes the premium price for local corn and factors in the exchange rate (increasing the basis price when the Canadian dollar is worth less than the U.S. dollar but discounting when the Canadian dollar is stronger).
Like Kell said, basis is a complicated beast.
