Monday, August 22, 2011

WA New Crop Basis weakening

There have been vast improvements in Western Australia for July and August, especially with good rainfall being received through some of the drier parts of the eastern central and lakes region of the wheat belt. The improvement puts crops back on track for at least average yields. In comparison to the rest of the state the Geraldton zone had a timely autumn break with conditions since then being excellent. CBH have forecast receivals to potential pass 3mmt this year, breaking the previous record of 2.6mmt that was delivered in 2008. Australian Crop forecasters have thus increased the WA crop by 1.2mmt to 7.9mmt, this compares to the five-year average of 6.4mmt and the 10-year average of 7.2mmt.

With the improving WA crop condition and wide spread rain throughout the East Coast last week, new crop basis has been weakening. Basis is the difference between CBOT futures, converted into Australian dollars with the domestic cash price subtracted from this. So comparing basis for new crop, we compared APW MG 2011/12 forward price compared to the Dec ’11 CBOT wheat contract.

Basis in drought years and especially in harvest like last year for the east coast plays a role in inflating domestic prices. The first big spike in basis levels was in early December when record rainfall across eastern Australia. The resulting delayed harvest stimulates strong prices and demand (both domestic and internationally) for higher protein wheat as bumper crops across Australia where downgraded into feed. Basis levels declined as weather cleared in second half of December and January, with headers stripping again placing record amount of grain into the market place.

At the start of the year basis was averaging -$10/t for Jan/Feb, bottoming out at -$25/t on 11th Feb. However as conditions continued to be dry and long range forecasts predicting no relief, basis moved into positive territory. Since Mid March until now it has averaged +$26/t. After basis reached a peak of +$38/t on 14th June, it has been in a slow decline as the WA crop has slowly improved. Currently basis is now sitting at its lowest price since the end of May at +$16/t.

When basis is high, rather then using swaps it’ll be better targeting forward sales with a forward contract. As swaps won’t have the high basis included, this is a good way in adding the extra premium on forward sales.

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