Wheat basis improves; futures could fall

U.S. millers fear quality shortage Basis could rise 30 cents but futures prices predicted to drop with large crops in Russia and the EU

There is a seesaw dynamic going on with wheat prices, says an analyst.

“The basis levels are not without optimism right now, but what concerns me is that the futures prices might have further to sink,” said Neil Townsend, director of CWB Market Research.

“The basis might improve by 20 or 30 cents (per bushel), but the futures might drop by another 70 or 80 cents.”

Basis levels for top quality wheat have risen by an average of about 50 cents a bushel in the last three weeks. The deduction is now about $1.50 per bu. or less instead of $2.

“It’s still higher than it has been, but it’s moving in the right direction,” said Townsend.

There are many factors pulling and pushing wheat prices, including:

  • A large global wheat crop that suffers from quality problems
  • A potential record breaking U.S. corn crop that could drag all grain prices down
  • Strong Canadian rail movement right now but the threat of more backlogs later because of a huge North American crop
  • Political instability in the Black Sea region and the Middle East

Elevator companies are sending a signal to growers that they don’t want them to do any on-farm blending. They are encouraging farmers to segregate their higher quality spring wheat this fall because there could be a shortage of milling quality wheat.

The hard red winter wheat crop in the United States is very short. A significant portion of what was already a small crop was rained on during harvest leading to diminished quality. U.S. millers are anxious about a potential shortage of milling quality wheat.

It doesn’t help that flooding this spring damaged crops in southwest Manitoba and southeast Saskatchewan, which is a prime area for producing high protein wheat.

Growers in the European Union are also harvesting a poorer quality than expected milling crop because of harvest rain, said Townsend.

So millers around the world may be increasingly looking to North America for supplies.

It all means that basis levels could continue to rise, especially if farmers are reluctant sellers of top quality wheat.

The quality of the Western Canadian crop is still a big question mark, but Townsend has a hunch it could be better than usual due to the hot and dry July.

But he worries that any further improvement in basis will be offset by a reduction in futures prices due to a plethora of wheat, coarse grains and oilseeds.

“Everything is heavy in global terms,” said Townsend.

Wheat prices have been artificially propped up by concerns about conflict in the Black Sea region.

“In reality, the Russians have a very good chance of being the top entity that will export wheat this year, like more than the European Union, more than the U.S. and more than Canada,” he said.

“I don’t think that has ever happened.”

Wheat prices are also benefitting from volatility in the Middle East. Investors believe if the violence escalates it will drive up crude prices and wheat will go along for the ride.

“I don’t know what news they’re watching, but it looks like it’s pretty terrible in the Middle East already. What more could go wrong?” said Townsend.

He doesn’t expect crude prices to soar because North Dakota is now producing one million barrels of the commodity daily.

“It’s a different world we live in,” he said.

Ukraine, China and the European Union also produced large wheat crops, which means there could easily be record world production.

And there is little doubt there will be record coarse grain production. That doesn’t bode well for corn prices, because the U.S. Department of Agriculture is forecasting fewer corn exports than last year.

If corn futures dip below $3 per bushel that will pull down wheat futures.

Townsend feels it will be a challenge for North America to export as much wheat as it did last year, which could also hurt price prospects.

“We are not price competitive on average right now and ocean freight works against us as well,” he said.

Lastly, there are the lingering transportation concerns in North America with another big crop coming on both sides of the border.

Basis levels will widen in a hurry if bottlenecks re-emerge in the rail transportation system, which means farmers could be facing a double whammy of slumping futures prices and widening basis levels.

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