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W. Canada | Thanks for taking this on. I was hoping you would reply Maize.
I only have a few minutes and will post again later tonight when I have time.
Yes my basis values are $CAD, I am not sure how relevant the actual currency is once exchange has been factored in. I believe that way at least each basis is relative to each other. I use the formula:
Adjusted Basis = Spot - Futures/CADUSD
Like May says, it is all about risk management. As Canadian farmers we have three variables: price, basis and lastly currency. I have ultimately convinced myself that any unprotected variable is a speculation. To me the basis risk is the one I would be wanting to take at the moment due to my experience saying the elevators risk premium on new crop basis is too wide. I could very well be wrong and the better option would be to pay the elevator the risk premium and not worry about margin calls etc.
What I can't quite get over is, if the dollar falls and I am long CAD, and short futures. When I bring back my money from the MGEX, I cover my CAD account losses with the gains from exchanging over, but I also gain when I price my basis at my elevator, as their unadjusted basis would have increased as well (given a potential fall in adjusted basis doesn't cancel the rise out which is very well possible as I am sure my records show that).
Maybe owning a call is a better way. CAD simply has to move enough to cover my risk premium either way correct? If it stays flat, then that is my cost of insurance.
Yep rolling basis in a carry market is a losing proposition, learned that one too and it was ugly. Story for another day...
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CWRS Basis
