Where is the wheat premium for next year?
The Snapshot
- ASX wheat is offering A$296 for the coming harvest.
- The Chicago wheat contract is trading at A$301 for harvest.
- This means that ASX wheat is trading at a negative basis.
- Typically ASX trades at a premium to Chicago.
- The only time ASX trades at a discount is during a year of surplus. Even then, it tends not to stay negative for long.
- ASX basis to Chicago since 2010; Min -A$26, max +A$181 and an average of A$42.
- The max will only be achieved during a drought when production is obliterated.
- Provided we don’t have a huge year of production, we would expect the basis to rise above zero.
- An extreme basis isn’t always a good thing, as it means end users are unprofitable and grain farmers are likely not producing enough to cover the deficit of production.
- Using CBOT and leaving the basis open may provide opportunities to lock in a higher basis at a later date.
The Detail
It doesn’t feel long since the headers were rolling, and in a few weeks the seeding rigs will out in action. Understandably, markets will not be the first and foremost thought – but it is always important to keep a close eye on the horizon – as it will come quickly.
This article will take a look at the ASX wheat contract (east coast) versus Chicago. These are two separate contracts used for hedging Australian wheat. The ASX contract is based on the physical delivery of Australian wheat, and the Chicago contract based in the US.
At present, the ASX contract is trading at A$296.5, and CBOT is trading at A$301. The ASX contract is for Jan 2022, and the CBOT Dec 2012, which are comparable for our harvest.
They are trading within a cat’s whisker of each other. This has been the case for the past two months.
It is understandable for the current year to be low (basis) due to the large crop, but why is the basis for next year so low, and which contract should you take out? US or Australia.
The historical perspective.
Presently, both contracts are trading at very similar levels for the coming harvest. As is representative of Australian wheat (at least east coast), how has it performed versus Chicago in the past?
Australian wheat tends to trade at a premium to Chicago; this has been the case for the past decade. The exceptions are during periods of surplus production when basis may become neutral or even negative. However, even when basis trades at a discount, it tends to only be for short periods.
At present, the basis on offer for the coming harvest is slightly negative. This is not reflective of an average potential season but of decent production. In March, the season could go in any direction. Therefore I wouldn’t be banking on a season of negative basis.
So what is basis likely to be?
In the past decade, the lowest basis level between ASX and Chicago has been -A$26, and the highest basis level has been +A$181, and an average of +A$42. This is based on the weekly average pricing.
Currently, the basis is slightly negative, which points towards the market not being overly concerned with access to grain at harvest. This could be a combination of factors, from high carryover, reasonable pre-seeding moisture and just a touch of apathy.
It is doubtful that we will have the high end of the range next season without a corresponding drop in production that drought brings. Let’s hope we don’t have an extreme basis level, as it is likely that this will correlate with low production.
While history is not an indicator of the future; I would expect a higher than zero basis as we come into harvest unless we have another great year. If we have another great year, at least production will make up for losses in basis.
It may be worthwhile leaving the basis open and locking in the futures component at a later date. Chicago currently offers A$301 with the basis to still be included. The basis level could end up negative, but on historical examples, it rarely is.
