Cash spring wheat basis now quoted as delivered Chicago value

BakingBusiness.com, January 12, 2010
by Jay Sjerven

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MINNEAPOLIS — Beginning Jan. 4, the cash spring wheat basis provided daily by the Minneapolis office of the U.S. Department of Agriculture’s Agricultural Marketing Service was quoted as a delivered Chicago/beyond value. Previously, the cash spring wheat basis was quoted as the Minneapolis value of wheat traversing that gateway to destinations beyond. The new cash spring wheat basis still was determined in relation to Minneapolis wheat futures.

The Minneapolis Grain Exchange (MGEX), which is host to the onsite A.M.S. office posting the cash spring wheat basis, in a Dec. 24 announcement, stated: “Due to changes in rate structures by a Class I rail carrier, effective Jan. 4, 2010, daily cash wheat and durum basis will be quoted as a delivered Chicago value. Applicable freight differentials to Minneapolis/St. Paul and Duluth/Superior delivery points will also be provided. Prices will continue to reflect values of rail cars offered and traded in the exchange room of the Minneapolis Grain Exchange for spot or immediate shipment.”

The Class I carrier involved was the Burlington Northern-Santa Fe, which is headquartered in Fort Worth, Texas, and transports much of the grain originated across the northern Plains. Mark Summers, director, wheat, in the B.N.S.F. agricultural products group, explained the railroad decided to base northern wheat freight rates as delivered Chicago because most of its wheat volume traverses that rail hub to eastern mills. He suggested the change made the railroad’s rate structure more transparent to some shippers who expressed confusion over the previous structure that involved one rate into Minneapolis and a different rate for wheat passing beyond Minneapolis when most volume in fact was shipped from origin across the Chicago gateway. The adjustment provided a single freight rate for these shippers from origin to Chicago.

Scott Nagel of Benson Quinn Commodities, chairman of the cash wheat committee at the Minneapolis Grain Exchange, said the new Chicago-based freight rate structure for wheat forced the committee and the A.M.S. to grapple with how best to post the cash spring wheat basis. The B.N.S.F.

effectively eliminated the Minneapolis/beyond rate on which previous cash spring wheat premiums were based for decades. The only remaining rail wheat freight rate relating to Minneapolis was an unload rate that applied only to two mills in the Minneapolis area. The unload rate was determined to be about 15c a bu higher than the former Minneapolis/beyond rate used in determining the cash basis.

Mr. Nagel said the two mills in the Minneapolis area constituted too narrow a base to maintain the cash spring wheat market. Since most wheat shipments traversed the Chicago gateway and the rail rate structure was changed, it was decided the cash spring wheat basis should be expressed as a Chicago value.

Layne G. Carlson, treasurer and corporate secretary of the MGEX, noted the cash wheat committee also considered the fact much of the trade already was writing wheat contracts based on Chicago wheat values.

Both Mr. Nagel and Mr. Carlson, as well as millers and other wheat buyers, affirmed most would have preferred to keep the old means of calculating the cash spring wheat basis based on Minneapolis values, but the change in the rail freight structure made the old method untenable.

The cash wheat committee, the A.M.S. office and the exchange agreed the A.M.S. should post daily the freight differential relating to the unload Minneapolis rate compared with the Chicago/beyond rate, and the freight differential relating to the Duluth/Superior unload rate and the Chicago/beyond rate. Currently, the Minneapolis freight differential equated to 15c a bu, and the Duluth/Superior freight differential was 25c a bu, with Minneapolis and Duluth/Superior at discounts to the Chicago/beyond rate.


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