Canada Markets

Weakening Cash HRS Basis Reduces Impact of Market Rally

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
Connect with Cliff:
@CliffJamieson
The March Minneapolis HRS contract hit a short-term low on Nov. 10 of $5.56/bu and has since rallied to Thursday's close of $6.61/bu. Over the same period, the average basis for 1 CWRS across the prairies has widened from 33 cents over the nearby future to an average of 32 cents under the nearby in Thursday's trade. (DTN graphic by Nick Scalise)
The March Minneapolis HRS contract hit a short-term low on Nov. 10 of $5.56/bu and has since rallied to Thursday's close of $6.61/bu. Over the same period, the average basis for 1 CWRS across the prairies has widened from 33 cents over the nearby future to an average of 32 cents under the nearby in Thursday's trade. (DTN graphic by Nick Scalise)

With Thursday's wheat rally showing signs of tiring with prices ending closer to the lower end of the day's trading range, producers express disappointment that the wheat rally on the prairies has been partially off-set by weakening basis levels.

As seen on the attached chart, the average prairie-wide 1 CWRS basis, as calculated with accessible on-line bids, reached a high of 33 cents over the December future on Nov. 10. On this particular day, the December future reached a six-week low of $5.56/bu (not shown), having traded below the support of the 66.7% retracement of the Oct. 1 to Oct. 30 rally, only to recover and post a bullish outside day trading bar, a trading range wider than the previous day's trading range with a close near the top of the trading range.

From that point forward, the HRS market has rallied, with the most recent activity showing a 56 1/2 cent gain in the past six sessions to end at Thursday's close of $6.61/bu.

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During this period of time, cash basis levels were widened by grain handlers on the prairies to offset much of this gain. Basis moved from 33 cents over the December (or 20 cents over the March given the minus 13 cent Dec/March spread at the time) to a calculated basis of 32 cents under the March basis Thursday, or a total move of 52 cents against the March future. As well, the spot Canadian dollar weakened from $.8789 CAD/USD on Nov. 10 to $.8623 CAD/USD today, a further potential benefit not realized by producers.

In addition to weakening basis, futures spreads also weakened Thursday (also viewed as increasing carry) with the March/May and the May/July spread each ending 2 cents wider.

While the market grapples with the huge global supplies available due to this year's record crop along with concerns that Russian exports will be restricted, the rally in the futures market may be showing signs of tiring, which may be explained by bearish commercial sentiment.

Cliff Jamieson can be reached at cliff.jamieson@dtn.com

Follow Cliff Jamieson on Twitter @CliffJamieson

(ES)

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The March Minneapolis HRS contract hit a short-term low on Nov. 10 of $5.56/bu and has since rallied to Thursday's close of $6.61/bu. Over the same period, the average basis for 1 CWRS across the prairies has widened from 33 cents over the nearby future to an average of 32 cents under the nearby in Thursday's trade. (DTN graphic by Nick Scalise) 
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