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Thursday, October 20, 2016

Jack Frost hits WA - but what impact on price?

By Andrew Whitelaw  |  Source: CME, GIWA, Trade

Key points

  • The frost events in September are estimated to have caused a 700kmt to 4mmt decrease in production.
  • Basis levels have had a minimal rise since the frost events.
  • The trade believes there will still be a large crop in WA, and is not worried about meeting commitments.

2016-10-20 Grain Fig 1

2016-10-20 Grain Fig 2

The Western Australian crop was on course to be one of the largest on record until Jack Frost made his presence felt throughout the wheatbelt. The estimates of losses have widely ranged, and this report will examine what if any impact these events have had on pricing.

During September there were an above average number of nights where the temperature dropped below -2c, over an area covering the Kwinana and Albany port zones. It can be very difficult to judge the full extent of frost damage but estimates range from 700kmt through to 4mmt, although we will not truly know until the lie detectors get into the paddock.

When a supply shock arises, logically we would expect basis levels to rise to ensure that buyers can accumulate stocks. This was the case in 2010/11 when Western Australia experienced some of the worst drought conditions in recent memory.

In figure 1 we can see that as it become apparent that the crop could not recover (August onwards), basis started to rise considerably through until harvest and maintained high levels through the first half of 2011. The basis levels then started to fall as the market realised the Western Australian crop in 2011/12 was likely to be a bunker buster.

So what has happened to basis in Western Australia after the recent frost events? In figure 2, we have plotted the basis levels since the beginning of August. It is clear that basis has increased somewhat, however only to levels from the beginning of September, and still currently below the average since August. In reality the mover higher has been minimal considering a potentially large loss of crop across Western Australia.

The question remains ‘why are basis levels not rallying?’. The first reason that basis may not have rallied is that even with a mid-range of estimates loss, there will still be a relatively large crop in WA. Secondly, the trade no longer has to worry about losing extremely large shipping auction premiums due to the introduction of long term agreements by CBH. This therefore reduces the impetus to pay large basis levels in order to meet shipping slot obligations. 

What does this mean?

Overall, if the September frost event is not enough to put a rocket under WA basis levels it is highly unlikely that we will see large increases in basis when we come into harvest when selling pace dramatically increases. 

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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