Basis levels under pressure

23 Oct, 2015 01:00 AM
The Australian wheat crop is likely to be close to 24 million tonnes

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.

Date: Newest first | Oldest first


Jock Munro
23/10/2015 6:03:53 AM

Plenty of theory in this report and why would anyone be surprised by the present uncertainty surrounding wheat pricing. But the reality is that merchants are doing what they do and that is talking the market down in order to source the cheapest possible grain for their end user customers. The grower who has no equity in the market place has had to deal with production variability and uncertainty and now he is faced with unmanageable marketing risk at a time where he is most vulnerable.
23/10/2015 5:32:54 PM

In the days of the single desk the grain was pooled. No forced sales. A fair go for all. Especially for those starting out. I was one of them and could not even think of starting with todays system.
25/10/2015 5:16:05 AM

bit of a typho the jock it should read "manageable marketing risk at a time where he is most vulnerable." Guess you will correct when you see this comment. Its 2015 famers have to learn basis its part of the farmers modern skills
what the
26/10/2015 9:38:34 AM

Incognito, basis is NOT part of "modern farmers skills", the grain trade completely manipulates it under producers noses which was the original pretext for the single desk, being screwed at harvest time has nothing to do with marketing and everything to do with a transfer of wealth from the people who do the hard work and take all the risk to produce a product to the carpetbaggers scammers and outright thieves in the trade
26/10/2015 6:18:42 PM

cash prices high futures low positive basis sell cash. Cash low futures high negative basis sell futures. All farmers under 35 know this.
Jock Munro
29/10/2015 6:19:11 PM

What incognito! Under 35's know how to take a risk that might break them?!
30/10/2015 6:08:11 AM

So what are you saying Jock? Do you have to be old to be smart?
30/10/2015 8:12:11 AM

If that's what farmers under 35 know about pricing grain, then most will go broke.
30/10/2015 10:05:02 AM

Munro is still holding his AWB shares. There is always a time to sell. Just ask a younger farmer
Jock Munro
6/11/2015 1:33:29 PM

This so called smart marketing where growers sell something that they don't have ,is a bit like Bungee jumping Dregular and co-just because younger people are more inclined to do it doesn't mean that it is not risky and foolhardy.


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