Because of our huge production, Australian wheat has been at a strong discount in recent years. So let’s have a look at how it is looking now.
The first chart shows the basis seasonality between Australian (east coast) and Chicago wheat futures. Typically we would be at a premium, but as we can see, for most of last year, basis was discounted.
This year, we have gradually increased our premium as conditions in Australia have worsened.
What does our basis level look like compared to historical levels? The second chart shows the percentile rank for basis.
The higher the number, the higher the basis compared to historical levels. In recent weeks, the ranking has been over the 80th percentile. This means that the basis level has been lower 80% of the time since 2010.
Basis levels are usually higher when drought is hitting and lower when a surplus is available. The question is, are the conditions poor enough to continue to hold a high basis level?
A strong basis, in my view, is not a good thing, as it means (generally) that farmers have very little to sell.