Mecardo Analysis - Wheat is wheat in a drought?
- By: "Farm Tender" News
- Cattle News
- Nov 06, 2018
- 484 views
- Share
By Andrew Whitelaw | Source: CME, Mecardo.
There is an old adage that during a drought, wheat is wheat. The wheat produced in the country will, for the most part, be going down a beasts throat, therefore grade spreads are not quite as important. We thought it was worthwhile taking a look at grade spreads to see what levels they are trading at.
The combination of drought and frost have led to the poorest crop in over a decade. At this point, there is little that could not put the crop further back (touch wood). The poor conditions have led to basis levels rising to post-deregulation levels. This is illustrated in Figure 1, which shows 2018 peaking above $180 over Chicago futures at Geelong. To put this in perspective, the average is $20.
It is easy to be distracted by the headline figure of APW, but we all know that there are multiple grades being harvested. In a drought, it is expected that grades become less important because demand from domestic feeders decreases the importance of grade spreads. It is worthwhile examining whether this is the case in 2018.
In Figure 2, the spot price for ASW since the start of the calendar year is shown*. We can see that the spread from APW to ASW narrowed from harvest until mid year, which coincides with increasing demand for feed. When we switched to the new crop contract, the spread widened. In the past two months, however, that spread has started closing the gap towards parity with APW.
In Figure 3, the same chart is shown for H2. The H2 grade is used for milling purposes. We can see an opposing trend, with the premium for H2 over APW declining throughout the year. This can be attributed to both the importance of feed demand negating the premiums for milling, along with drought conditions leading to greater likelihood of high protein levels. Since September, premiums have increased, but they have started to taper off.
*Our spot contract changes from old crop to new crop in June.
Key points
* Basis levels are at post-deregulation record levels.
* Old crop ASW trended towards parity between harvest and Jun
What does this mean?
The next month will give clarity on the quality profile of the crop and we will start to see which way grade spreads will move.
It would not be surprising to see the spread between APW and ASW/H2 narrow, either in December or into the new year.
www.mecardo.com.au
www.mecardo.com.au
Share Ag News Via