Last week we looked at the Australian Bureau of Agricultural and Resource Economics and Sciences Crop Report, noting the strong growth in the forecast for the Australian wheat crop. Wheat prices might be higher in absolute terms in the last week or so, but in relative terms, they are on the slide.
Regular
readers will know that the absolute price of wheat is not the only way to
determine value. In fact, most of the
time the price of wheat tells us very little about local and demand. In most years, the majority of the wheat
price is determined by the international price.
Most of the
wheat produced in Australia is exported, therefore it has to be competitive
with international values to find its way into markets. Therefore the international price gives us
the base level of wheat values. Figure 1
shows both Chicago Soft Red Wheat (SRW) Futures and ASX Wheat Futures. In general, the prices will track closely
together.
Local
supply and demand will help determine how wheat is priced relative to the
international value, we call this basis.
A smaller crop in Australia will often see growers hold onto wheat a bit
tighter, with consumers and exporters having to bid a little higher than the
base price to get it. In a big crop
year, when on farm storages are filled, and plenty of wheat is cashed at the
warehouse, wheat can be priced at or below the international benchmark.
Figure 2
shows the spread between ASX wheat futures and SRW futures. The last fortnight has seen the basis weaken considerably,
moving from $50/t to $7/t. The strong production
forecast has seen the ASX futures remain relatively steady while SRW has been rising,
seeing basis shrink.
ASX Futures
are always priced at the lowest value deliverable port. At the moment this is in NSW, where the Port
Kembla APW price was $300 last week. Prices
are better in the south, where wheat is expected to be in tighter supply. Stronger southern prices are likely to be
maintained this year.
What does it mean?
ASX Futures will this year be a NSW price, and southern values could move to a premium, which will be limited to the cost of freight. A basis of close to parity to SRW can be expected in a large crop year, so producers can use SRW to hedge with confidence. We are now approaching harvest, however, which is usually a good time to manage harvest sales with forward contracts, if the basis is deemed acceptable.
Key Points
- ASX Wheat Futures have weakened relative to SRW recently as NSW crop conditions improve.
- While ASX has remained steady, SRW has risen, seeing basis weaken considerably.
- Prices in the south are now stronger than those in NSW.
Click on figure to expand
Click on figure to expand
Data sources: Refinitiv, Mecardo
