Long-time readers will know how we like to look at price spreads as a pointer to buying or selling opportunities. Recent fluctuations in international wheat prices have created plenty of scope for ‘basis trading’. Here we look at a few things to keep a lookout for.
When we
talk about ‘basis’ we are referring to the difference between two prices, or
the spread. In this example, we’ll use
Chicago Soft Red Wheat Futures (SRW) and ASX Wheat futures.
ASX Wheat
Futures are a good proxy for local wheat prices, as they reflect the lowest
prices port value of APW on the East Coast.
As we get closer to harvest buyers and sellers can use physical prices,
using basis as a guide for timing.
The recent
rally in SRW wheat futures took ASX Wheat futures with it, but they moved a bit
slower. When SRW was in the doldrums,
around $300/t, ASX wheat was holding a premium, with a basis ranging around $30/t.
As SRW
rallied, the basis shrunk. This often
happens here, with the market not reacting as quickly to movements in SRW. By the time SRW peaked in late May, ASX was trading
much closer, with the basis reaching
within $12 of parity.
It’s easy
in hindsight, but whenever ASX basis to SRW is near zero in what is shaping to
be an average production year, it is cheap.
An example
of basis trading would have been to sell SRW at $394/t and buy ASX at $394,
thereby ‘buying’ basis at zero. Last
week we could have traded out by buying SRW at $328 and buying ASX at $357. Profit on SRW would have been $66, loss on
ASX of $37, resulting in a net gain of $29/t.
This is
obviously how the trade would pan out with perfect timing, and was likely not
achievable, but it shows the opportunity.
There is some downside risk in basis trading, but knowing how prices
historically relate to each other can add confidence to the trade.
What does it mean?
ASX basis is probably about right now, given the uncertainty surrounding the season, so there isn’t really an opportunity to trade basis currently. Keeping an eye on basis remains important, however, even if not trading, it can be a good pointer to when to buy and sell physical grain.
Key Points
- Sharp movements in grain prices can create basis trading opportunities.
- The recent decline in local basis was a good example of when to ‘buy’ the basis.
- Even if not trading, knowing how the basis works helps with buying and selling decisions.
Click on figure to expand
Click on figure to expand
Data sources: Refinitiv, Mecardo
