Market Morsel: Basis narrowing? Don’t be sure.

Market Morsel

Basis for Australian wheat has been negative for much of the past two years. However, in recent weeks basis has been improving or has it?

The first chart below shows ASX wheat vs CBOT wheat futures for this harvest. ASX is effectively and APW (or above) contract. In recent weeks it has been moving in between a premium and narrow discount. So it’s all good, basis is back to near normal levels or is it?

There isn’t going to be all that much higher quality wheat around, especially in the eastern states. ASW and below are likely to be the mainstay.

In the second chart, we can see the monthly AGP basis during November going back to 2002. We can see that the basis level is at a large discount and in most port zones higher than last year.

Why is this occurring? Well there is going to be a power of low-quality grain around and a higher supply tends to be a weight on prices.