- The wheat market in Australia has crashed this week.
- CBOT wheat has fallen, but not to the same levels.
- This means that the majority of the fall is occuring from basis declines.
- The reality is that there are a lot of farmers all selling grain at the same time, so there is a large ‘supply’.
- A large supply reduces the incentive to pay more out of fear of missing out.
I will spare you the details, but I have spent all of this week with a disastrous bout of food poisoning, and so until Wednesday, I didn’t really even take a look at my phone. When I looked at the grain prices, it was enough to cause some nausea.
So let’s have a look into what has happened, as I have at least two dozen messages on social media about this. So I thought I would get out of my sickbed and put some thought into it.
Let’s look at the global versus local picture first. The chart below shows the ASX wheat and CBOT* contract for this harvest going back to June.
The basic picture shows that ASX wheat has been discounted to CBOT for most of the period, apart from a very short period at the end of November. The second chart shows the extent through the weekly changes in basis. There was a huge rise in basis in November when the concerns about the rain were the highest, the fall in the last week is at contract highs.
Let’s look a bit more locally. The chart below shows the weekly average change in price for APW1 across the country for last week and so far this week. It is quite shocking the extent of the price fall this week when we compare to the fall in international values.
It is pretty much all basis (read here to understand basis)
So why is it happening just now?
Basis is driven by supply, and if there is any time that basis is liable to come under pressure, then it is during or immediately after harvest. The reason is that the overwhelming majority of grain produced will be sold during this period. This essentially brings all the supply forward at the same time.
There are few buyers and many sellers, and with a large crop being harvested, there is no fear of missing out, therefore no incentive to pay up more. It’s ‘harvest pressure’.
*CBOT switch to March in early December