August 11, 2022
Weekly Market Highlights
- Markets have been up this week as weather forecasts have caused concern in the market. Domestica and European weather has a likelihood to damage the yield potential of the crops.
- Three ports in Ukraine are now operational, and 10 ships loaded with grain have set sail from them in the past week after the United Nations and Turkey brokered a deal for safe travel through the Black Sea.
- The USDA will release its monthly WASDE report on Friday. Analysts expect to see all-wheat production in 2022/23 to increase slightly, to 1.791 billion bushels. That would include 1.203 billion bushels of winter wheat, plus 510 million bushels of spring wheat and 77 million bushels of durum.
The Wheat Basis in Perspective
We’ve discussed previously that flour is priced based on the interaction of Wheat futures, cash basis and millfeed.
Most would agree that futures are usually the main determinant of the flour price and almost always the most highly publicized.
Of the three components (futures, basis and millfeed) the cash wheat basis is probably the least understood and probably of the greatest focus to the flour miller.
A textbook might define the basis as the numeric (cents per bushel) description of the relationship between the futures contract and the physical commodity.
A practical way to understand the basis is to contrast it with futures. In general, futures markets measure and respond to “macro” or global inputs such as droughts, foreign demand for wheat and government subsidy programs.
The basis reflects the difference between the futures price and the price of “cash” or actual bushels of wheat. It serves to adjust the futures price for more localized or “micro” factors. For instance, the basis at a particular location might be influenced by delays in rail shipments, variability in wheat quality or protein needed or even the amount of storage capacity at a particular location.
It might look something like this; If the Minneapolis December futures are $3.50 per bushel but a mill in Des Moines must pay $4.00 to attract sellers of a particular grade of wheat, we would say that the Des Moines basis is +$.50.