The fall in the wheat market

Grain | 10th December 2020 | By Andrew Whitelaw

The Snapshot

  • As harvest continues, the wheat price has fallen.
  • Flat price APW1 has fallen between A$44-50/mt since the last week of October.
  • ASX wheat futures have fallen A$50/mt, and CBOT futures have fallen A$34/mt
  • Around 2/3 of the fall can be explained by moves overseas, with the other 1/3 local moves with basis declining.
  • The basis level in Australia is typically driven by supply. High supply = lower basis and vice versa.

The Detail

Harvest is going with gusto, and it’s expected to be a rip-snorter. In recent days there have been some concerns related to the price movement since October. This is an opportune time to delve into where the action has occurred.

The market experienced a strong rally during October which provided farmers with an opportunity to lock in futures or flat price wheat at healthy levels. The market has fallen, which is concerning for many who are starting to make sales.

The flat price APW price has fallen by the following levels since the last week of October.

  • Geelong A$44 or 14%
  • Kwinana A$50 or 14%
  • Port Kembla A$50 or 16%

The Australian wheat market doesn’t operate in isolation, events which happen overseas impact upon our pricing. In general basis or local factors influence around 10-20% of the overall price. The influence of basis on overall price reduces in years of large supply and increases during drought.

The price of futures makes up the lions share of the price received. The chart below shows the price of ASX wheat futures for January and CBOT wheat futures for December in (A$/mt).

The ASX wheat contract has declined A$50 (-16%) since the last week of October, whilst the CBOT contract has fallen A$34 (-11%).

The ASX unsurprisingly has married up with physical pricing quite well, as it is based on Australian delivery. The CBOT contract has had a smaller fall than what we have experienced locally.

This means that our basis level to CBOT has fallen. This isn’t necessarily surprising, and something that TEM has flagged as a risk for some time (see here, here & here).

So what has moved price?

Whilst some speculate that the fall in the market is the nefarious actions of local trading teams. The reality is that the market is the market.

A large part, around 2/3 of the move in local pricing has occurred due to the move lower in overseas futures levels. Approximately 1/3 of the move can be explained by depreciating basis. This is due to the continued improvement in expectations around the wheat crop.

This year has provided some great opportunities to lock in very high wheat prices. The highlights were March, and in October.

Tags

  • ASX Wheat
  • CBOT Wheat
  • Wheat
  • Basis