ONE scenario for the Australian wheat market is that cash prices will fall as we enter our main harvest period, driven lower by weakening US futures prices, albeit gaining some support from strengthening basis levels.
The Australian wheat crop is likely to be close to 24 million tonnes, well down on the USDA forecast of 27 million tonnes.
However, this will still constitute a significant crop that will have to be moved into global markets that are already well supplied with wheat from another record global crop.
The other scenarios are for rising prices with futures and basis lifting, a stable market with futures lifting and basis falling, or a collapsing market with both futures and basis falling.
Of all the scenarios that can unfold, the ones where futures ease and basis holds or lifts, are most likely, delivering a flat to falling cash market as Australian growers begin to make sales off the header. Once exporters and domestic end users have some coverage, basis is then more likely to come under pressure.
What is not likely is for basis to lift at the same time as US futures lift. There is a cap on how much buyers will pay for Australian wheat, and as we saw last harvest, if futures do rise only a part of those gains will come into our market.
Likewise, at least for a while, basis is likely to cushion us from declines in US futures. The trade here still need to buy wheat, and if prices are seen as falling too sharply, Australian growers will do what they can to delay selling. We also saw this last year, where prices resisted the full fall in US futures prices as rising basis provided a buffer.
Basis levels have already come under pressure in New South Wales and Victoria, losing ground over the week ending Monday this week, against basis that lifted a little in South Australia and Western Australia.
The dry spring in Australia has been priced into our market, but at the same time we will need to be exporting from every port zone this year. That means that Australian wheat has to be competitive, and excessive basis levels will make our wheat too expensive for global markets.
At this stage basis levels have recovered to around $20 per tonne at Port Adelaide, with an additional $20 per tonne in Western Australia, which is about right for their pricing system and cost structure. How much above Port Adelaide prices need to be in Victoria and NSW is the question.
While Victorian wheat needs to be stopped from flowing to South Australia, and some South Australian wheat might need to move into Victoria, Melbourne prices $20 per tonne above Port Adelaide should be more than enough to see that happen.
If basis levels of $20 per tonne leave export values in South Australia uncompetitive, then it will pressure wheat prices further in all port zones, even if east coast ports retain some relative strength over South Australian and Western Australian basis levels.
What is clear to see is that the high basis levels of recent years, driven by weak crops in northern NSW, are not sustainable when we see a better pattern and level of production across NSW. High basis levels are not automatic, nor here to stay, when we have to be more competitive in global markets.
Malcolm Bartholomaeus is the market analyst for Bartholomaeus Consulting, Clare, South Australia.