Sorting grain

A week is a long time in commodity markets. Last week we looked at wheat values and whether it was worth growers making a start on selling. With the rapid declines in Chicago wheat over the last week, grain consumers might be questioning whether they should be looking at securing a portion of their buy price for the new harvest.

While grain producers are often advised to leave ‘basis’ open, it can be the opposite for consumers, who are exposed to large amounts of basis risk in some seasons.  ‘Basis’ is the difference between the local price of wheat and the international benchmark.  Chicago Soft Red Wheat (SRW) Futures are usually used as the benchmark, while local prices can be anything, but we usually use port values.

Figure 1 shows APW prices at Australian Ports for the last 8 years and SRW.  Generally, local prices follow SRW closely as we usually export a majority of our wheat, and it competes with SRW for buyers. 

During drought, Australia doesn’t produce an exportable surplus of wheat, and local supplies become tight.  In 2018/19, and during droughts before that, wheat moved to the import parity price.  That is, what it would cost to bring wheat in from another country. This price was at a significant premium to SRW.

Grain producers want to leave the basis open to take advantage of drought premiums for the grain they do produce.  Consumers want to have basis locked in, as it is a key price risk for them. 

SRW prices are currently near $350/t in our terms.  Not particularly cheap over the last 8 years, as shown in Figure 1, but the cheapest they have been in 14 months.

Local wheat prices are close to SRW, as is new crop, with the market pricing in another reasonable crop.  While the season looks good now, the lurking El Niño could see local prices move higher, and basis risk makes feed grain more expensive for consumers.  In 2018-19 increasing basis added $200/t to wheat in NSW.

If a consumer had hedged on SRW, their eventual net price would have been $200 higher than expected.  The opposite happened when the US price went crazy with the war in Ukraine, anyone who had bought SRW made a much larger profit than the extra cost of grain here.

What does it mean?

Wheat futures were lower post WASDE report release as the cuts to US demand led to marginally higher stocks than expected. The CBOT Dec-22 wheat contract fell 1.6% in AUD terms. With the outlook for soybeans remaining tight and in high demand, this will support oilseed fundamentals into 2022.

Have any questions or comments?

We love to hear from you!

Print This Post

Key Points

  • Wheat prices have been falling, and are now at a 14-month low.
  • Grain consumers need to manage basis, and can’t just hedge on international markets.
  • Hedging using physical forwards or ASX Futures will protect against El Niño induced price rises.

Click on figure to expand

Click on figure to expand

Data sources: ASX, CME, Refinitiv, Mecardo

Make decisions with confidence- ask about our board packs, bespoke forecasting and risk management services

Have any questions or comments?

We love to hear from you!
AdamMeyer_125638758_CanolaSaltLakeHarvest-scaled
Grains & Oilseeds

Prices aligning for canola

Canola producers who are windrowing or harvesting at the moment are getting a pleasant lift in values even as deliveries roll in. The improving market

Read More »
Australian wheat farm
Grains & Oilseeds

Mixed signals and bad poetry

The wheat market is trying to balance the news coming out of Russia. On one hand, SovEcon has released its outlook for the Russian 2025

Read More »

Want market insights delivered straight to your inbox?

Sign up to the mailing list to get regular updates to new analysis and market outlooks

Independent analysis and outlook for wool, livestock and grain markets delivered to you as it’s published

Commodity conversations podcast cover image, a illustration of a sheep standing on a cow's back with grain either side
Listen to the podcast

Join the Mecardo team for the Commodity Conversations podcast, where we provide short weekly market recaps and longer conversations with guests to discuss the drivers and trends in livestock, grain and fibre markets.

Photo of a farmer surrounded by Merino sheep in dusty yards
Research: Analysis of the Australian sheep flock

In this report for LiveCorp and MLA, we analysed the historical trends in the demographics of the Australian sheep flock, examining domestic factors that influence farm-level enterprise decision making. 

Image of harvested grain pouring into a chaser bin
SERVICES AND CAPABILITIES STATEMENT BROCHURE

We don’t just bring you the most up to date market insights. Find out more about Mecardo’s services including risk management advisory, modelling, benchmarking, research & consultancy.