By Augusto Semmelroth | Source: ABARES, ASX, CME, CBA
With the wheat harvest gathering momentum on the east coast it’s a good time to check potential basis scenarios for this harvest. ABARES is forecasting east coast wheat production at 17.1mmt. However, the Commonwealth Bank (CBA) is pegging it at only 15.5mmt. How much can basis vary at harvest? And how will these different scenarios affect the basis?
As a general rule, Australian wheat trades at a premium (positive basis) to international markets. This premium derives from the high quality of the domestic wheat and the relative proximity to key export markets. That said, local prices do not always trade above international levels, especially in years of above-average production and abundant stocks.
Australian wheat production is relatively variable and is highly dependent on seasonal conditions. As such, local basis tends to be volatile and varies according to the supply availability in a given season. In general, basis is strong in years of tight supply and weak in years of plentiful supply. Furthermore, basis tends to ease between November and January as a result of harvest pressure.
Figure 2 and 3 show the general trading range over the last 10 years as well as the average value and individual seasons (strong and weak years). These numbers are calculated using the ASX MW futures prices and CME Wheat. On average, ASX prices track around $15-30/t above CME, but vary within a -$20 to +$60/t range for 70% of the time.
In years of favourable growing conditions and above average production, basis generally falls into negative territory during harvest. Season 2011/12 is a classic example of that as good seasonal conditions saw east coast production at 18.8mmt and basis at -$20 at harvest (figure 1 and 2).
The opposite is also true. In years of poor growing conditions and a smaller crop, the basis widens to see local prices trading at sizeable premiums to international markets. That’s exactly what happened this season and in 2006/07 (figure 1 and 3). Season 2010/11 was an exceptional case where a wet harvest impacted negatively on wheat quality to see milling wheat prices rebounding in December and basis to CME rallying (figure 3).
After a trading at around $35/t between May and August this year, ASX basis to CME started to ease in the last two months and is now averaging $10/t in October. That’s very similar to what happened in season 2005/06 when a crop of similar size was produced (figure 1 and 2).
Australian wheat basis to international markets are highly influenced by production prospects and actual supply. This leaves us pondering on what to expect this coming season, where production should be above 2012/13 levels but in-line with the 5-year average.
The latest ABARES Crop Report from September is pegging east coast production to be 12.5% higher year-on-year at 17.1mmt. However, CBA released a report yesterday calling the crop size at only 15.5mmt, or only 2.2% higher year-on-year. Dryer conditions in September and October led the bank to cut its production forecast for the east coast by 2.5mmt (14%) from August estimates.
Should the actual crop size be around the 17mmt mark (ABARES), basis will have more downside from here and is likely go into negative territory in December/January. If the production comes more in-line with CBA estimates, basis will have little downside from here and should trade within a $0-15/t range during harvest.
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