Do we have a basis to complain about the wheat price?
The Snapshot
- This year is not going to be as good as the recent high years, either for price or production in Australia.
- Wheat futures have rallied in recent weeks on weather concerns.
- Basis is currently low. If we see a reduction in production, then we would expect to see basis increase.
- If you are a consumer, examining basis at the moment may be worthwhile.
- The crop is looking dry in Western Australia and large parts of South Australia.
The Detail
Seeding is starting around the country; in some areas, it is dry and in some it’s reasonable. We can say that this year is not as good as the ones we have experienced in recent years. We aren’t going to have a record-breaker, but what does that mean for pricing?
Let’s have a look at what our pricing is doing.
The price you receive for wheat in Australia is made of three components: futures, fx and basis. The majority of price movement in wheat can be attributed to futures, the other components are important but have less of an impact on the overall price you eventually receive.
The chart below shows the future prices of the four main global bourses. The peak in 2020 occurred due to the Russian invasion of Ukraine. The market is higher than the decade average but is significantly lower than in 2022.
We cannot expect a peak like we experienced then unless we see some major disruption to grain markets either through really poor weather or an escalation in Ukraine. We can’t say never, but we also can’t rely on it.
Many people overcomplicate basis, but it is just the difference in price between the physical price you are quoted and the futures. Basis is driven by supply and demand. When supply is low in Australia, the basis will rise strongly and vice versa.
In the chart below, I have displayed the spot futures price against the spot physical price.
The timeframe is 2018 to the present, as this gives some really distinct periods of importance for basis. In 2019 we had the last major drought in Australia, which lead to domestic consumers paying up to ensure that they got access to grains for their purposes. We saw the basis rise to extremely high levels, and our wheat was the most expensive in the world at the time.
Then came the good times. As we had some big crops, our basis level moved to a strong discount, as our supply was abundant.
What about just now? It has been interesting in recent months. At the end of last year, we moved to a fairly strong premium over Chicago as there were concerns about emerging dryness. That concern seems to have gone as our basis level has moved to parity with Chicago.
The exception is Western Australia, which has remained at a premium as dryness has persisted.
We still have a long way to go until harvest, and if we start to see the crop going backwards, then we should see basis rally.
