Market Morsel: Rain removes premium for wheat

Market Morsel

In late January, I wrote about the prospect of La Nina, and that it would likely result in basis levels falling (see here).

Basis is the premium or discount between local physical pricing and the futures market. Generally, when people are talking about basis in Australia, they are referring to the difference in price to Chicago, but people should be specific, as it could be against any other contract.

The reality is that basis levels go to strong premiums as supply drops, and the basis goes to a huge discount when we produce a huge crop.

La Nina increases the chance of an above-average crop, and since the prospects of a La Nina event have increased, we have seen the premium for Australian wheat decline.

It is a two-edged sword. If we have low basis, it means we have more volume to sell, if we have high basis it doesn’t generally cover the overall loss in production.

It’s still a long wait to go until harvest.