Market Morsel: Vanished basis
Basis is one of the fundamental terms that must be understood by farmers when trading their grain. At its most basic, it is just the difference in price between the physical price received by the farmer, and a futures market price.
The driver of basis is generally supply. Low supply of grain and basis jumps, high supply and basis drops.
I have spoken about this several times since our inception (here, here & here). So it will not be a surprise to any of our readers that basis has come under pressure.
This seasons crop is immense. It is difficult for the trade to purchase it all between November and January, due to logistical constraints and credit capacity.
Historically basis has represented around 10-15% of the overall price received by Australian farmers. This year all port zones had dropped well below the average, with the east coast dropping into negative territory.
Again this is just an example of supply and demand. It should be expected in years of surplus, especially significant ones.