Basis on the rise

The weather continues to be the biggest driver of the market both globally and now increasingly at a local level. The Australian crop is currently on the precipice, with a huge degree of risk currently being priced in. In this weekly comment, I take a look at the weather forecast and basis levels.

Figure 1 displays the December wheat futures contract since the start of the year. This contract aligns with the Australian harvest and is typically the most appropriate for hedging purposes (for producers). As we can see much of the gains of early May have been lost. At it’s highest point in May the December contract was at A$279/mt, although in recent days the market has gained some traction, the current level of A$261/mt is not an insubstantial fall. The market however is prone to volatile behavior at this point of the year, and large market swings can potentially occur.

Our biggest concern for both grain producers and consumers in Australia, are the local conditions. The BOM released their rainfall forecasts for June to August (see map). This map details the change of above median rainfall. Our concerns are growing for the majority of the wheatbelt, but especially NSW and WA. Our hope is that the forecasts are wrong, and that a deluge is imminent.

Let’s take a look at basis levels (Aussie premium or discount over CBOT). As we all know, our basis level will increase when weather conditions deteriorate. In figure 2, the spot (old crop) basis is show, as we can see the basis level has increased dramatically in the past week. This is as a result of both the weather premium, and demand for the shrinking stockpile of old crop, especially in northern feed demand areas.

In figure 3, the new crop APW1 MG basis is displayed. The basis level has increased to it’s highest point this season. Although there is still a long way to go before harvest, if weather conditions remain dire, then this basis level will increase. This will provide minimum solace, as high prices and poor yield is a poor outcome for everyone.

If you are interested, I was asked to give a summary of the market to the Sky News Ag Show. The video is on the link below. However, please note I am not a seasoned TV personality!

What does it mean/next week?:

Let’s just keep an eye on the weather. Although cash prices are currently high, it is prudent to think strongly about physical risk, and washouts at present.