Weaker basis level no surprise

By Malcolm Bartholomaeus
January 14 2022 - 12:00am
Weaker basis level no surprise

Nearby futures had three major peaks during 2021. The first in April hit just below 770 US cents a bushel. The second major peak arrived in August and also failed at just under 770 USc/bu. In November we had a third run up, with the market hitting 797 USc/bu, before running all the way to 863 USc/bu on November 24.

Since then, the market has been in a downward trend that extended last week, to a low of 749.75 on Thursday night, before recovering to 760.5 USc/bu on Friday night.



It is no surprise that Australian cash prices have also fallen away, firstly because of our stalled harvest getting going again in mid-December, and then as offshore prices dropped.

The South Australian market continues to lead the country, but with prices down to $377 a tonne at the end of last week. Kwinana FIS prices were reported at $370/t, and the other port zone close to Port Adelaide was Pt Kembla, where some preferred sites in that zone were close to $375/t port basis.

Weaker basis level no surprise

Basis levels measure the gap between the $A value of Chicago Board of Trade futures and our own cash market. At the end of last week Pt Adelaide prices were $12.41/t under March CBOT futures. That's not bad in the context of the current market.

While basis is as much as $20/t weaker than we might normally see, in the context of very high global prices and a huge Australian crop, it is not a surprising basis level. Add to that the view that CBOT futures (i.e., United States wheat prices) are uncompetitive in global markets, then for us to compete we need to be a bit lower against US futures than normal.

Some growers are holding milling wheat from harvest on the assumption that global shortages, and huge weather damage to our own crop, will see shorts of milling wheats during the year, with a rebound in prices to above $400/t.

That is always possible, but I don't share the enthusiasm. A lot of Australian wheat was downgraded, but with a huge crop, there is also still a big supply of milling wheat for both exporters and domestic users. To expect a wholesale rally for milling wheats on domestic supply issues seems a bit much to expect.

A move back to above $400/t is more likely to come from a surge in US futures prices (i.e., US and global wheat prices) on the back of problems with the 2022 northern hemisphere wheat crop. To get there we are likely to have to see a 100 USc/bu rally in wheat futures from current levels, and stronger basis.

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