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Wheat Basis and Convergence Mark
Nelson
July 2010
Kansas State University Economists Dan O’Brien and
Art Barnaby recently released a
paper entitled, “Why have the KC Wheat Futures
and Cash Prices Not Converged?” The
paper does a good job of discussing the issue of
extremely wide wheat basis in the high plains,
focusing on the fact that a significant portion is
the result of a lack of convergence.
What
is convergence? If wheat futures prices are truly
reflecting wheat market fundamentals, cash wheat
prices at delivery locations and wheat futures
contract prices should converge (more or less
equalize) at futures contract expiration (less any
receiving/delivery charges and price differential
based on location).
Thus
for Kansas City, a par delivery location, and the
KCBT July wheat futures contract, this means that
cash wheat prices in Kansas City should be nearly
equal to July KCBT futures during contract
expiration (roughly June 30 to July 14). The chart
below illustrates the convergence of KCBT July wheat
futures convergence by comparing basis or the
difference between local Kansas City, MO HRW truck
bids on or near the date of July 6 for the years
2003 to 2010, versus the price of the expiring KCBT
July wheat futures contract. During the years 2003
to 2007 basis averaged $0.024 per bushel; meaning
cash wheat prices on average were nearly 2 ½ cents
greater than the expiring July KCBT wheat futures
contract price. In 2008 and 2009 cash prices were
$0.25 and $0.16 under the expiring July KCBT wheat
futures contract price and now this year, cash
prices in Kansas City are 67 cents under the July
wheat futures contract. Clearly one might argue
that there is a problem with convergence.
During the years 2003 to 2009 basis averaged a minus
$0.04 per bushel, meaning cash wheat prices on
average were 4 cents under the expiring KCBT July
wheat futures. This year, basis is 63 cents weaker
than average. If we could add this 63 cent anomaly
back to the current ($1.15) wheat basis in Salina,
basis would be a minus $0.52 per bushel, still very
wide for Salina but much more in line with the tight
storage and weak demand fundamentals that were
seeing in the wheat market.
In
the
KSU paper, they list several potential solutions
to the convergence problem and while I think the
KCBT should study and possibly consider replacing
the set storage rates that delivery or “Regular
Elevators” can charge with a “variable storage
rate,” similar to what the CBT adopted, I more
importantly want to hear what you think.
Please feel free to call or email me with your
thoughts on this subject.
Mark Nelson (785) 587-6103,
nelsonm@kfb.org
Comments?
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