Basis out of stasis?
- Australian basis levels tend to be driven by supply.
- When we have a large supply basis falls to negative, and vice versa.
- Basis levels have been heavily negative since the break of the drought.
- The prices received by farmers in Australia are strong historically speaking. Drought pricing without the drought.
- Relative to overseas values, they have been low.
- In recent weeks the futures market has declined; however physical prices have fallen less sharply.
- This has caused basis levels to narrow significantly.
Basis is a good indication of the relative value of our grain versus the futures markets. Although many like to overcomplicate, it is literally just the difference between the futures price and a local physical pricing point.
Historically speaking, the price of wheat locally in Australia has been very high. The chart below shows the flat price (basis, futures and fx) from 2010 to the present. This is essentially the price that farmers receive.
The key point is that prices are as high now as they were during the 2018-2019 drought. This is great because at least farmers have something to sell. High prices with no supplies is not a great scenario.
Let’s look at the underlying basis. The chart below shows the basis levels from 2010 to the present. What we can see is that the basis levels in Australia collapsed when the drought was broken, and the large crops over the past two years started coming to market.
If we look at the drivers of basis, supply is the major one. When we have a big crop, the basis tends to slide. Conversely, when we have a small crop (2018/2019) we start to experience high basis levels.
During the past two months, the futures price has declined, however the pace of fall in local pricing has been less. This has allowed basis levels to return closer to a more normal level.
The encouraging thing is that the basis levels for new crop have improved significantly. Last week, our pricing levels (for ASX) were a premium to CBOT.
The big question will be how big the Australian crop is. If we have a big crop, we will expect basis levels to languish.
However, the good thing is that whilst we didn’t get the full value of the rise in futures in recent months, we have recently had the full punishment of the fall.