MARKET MORSEL: LA NINA – TIME TO THINK ABOUT BASIS?

Article courtesy of episode3 | By Andrew Whitelaw , EP3

The Snapshot

• There are models showing a return to La Nina.
• This would be the fourth La Nina in five years.
• A La Nina increases the chance of wetter conditions, especially in the eastern states.
• More wet equals more wheat.
• As production increases, our premium declines.
• Basis is at a premium in Australia versus Chicago futures.
• It is possible to bank this basis premium and continue exposure to overseas futures.

The Detail

I read the news that Australia could potentially develop another La Nina, which would be four La Nina events in five years. As we all know, La Nina brings a higher chance of wet weather, especially in the eastern states.

I won’t say whether there will or won’t be a la Nina because I’m not a meteorologist; I’ll stay in my lane. What should we consider in relation to pricing?

It is not too early to look at marketing for next year’s crop; we should always be looking for opportunities.

The chart above shows the ASX and CBOT wheat contracts for the coming harvest. I am using the ASX contract as an easy representation of Australian wheat, but it could in reality, be a physical contract with your local buyer.

The Australian contract is currently trading at a premium to the Chicago contract. This basis will likely drop to a discount in our hypothetical bumper crop scenario.

So what can you do?

• Sell a physical contract
  – That is, sell to your local merchant and lock in a physical price. This would cement your futures, foreign exchange and basis.
  
• Sell a physical contract, buy a futures contract
  – Sell a physical contract (or ASX wheat), and buy a CBOT (or other overseas futures) contract.
  
  

In option 1, you remove all pricing risk from the table. You have locked in a price that will have no movement other than quality on your multigrade.

In option 2, you’d be locking in the basis element of your price. You would then be open to any upside and downside in the futures market.

The world is very volatile, and I do not recommend putting all your eggs in one basket. In fact, I never recommend that. Considering a range of options to protect your price risk in grain is worthwhile.