Wheat basis levels improve, futures stay bearish

CNS Canada –– Canada’s spring wheat basis has hit fresh highs to spur producer selling, but overall the market remains bearish.

“It does seem kind of counterintuitive to see cash prices strengthening right during harvest,” said Brenda Tjaden Lepp, co-founder of FarmLink Marketing Solutions in Winnipeg.

Over the past week, quoted basis levels for Canada Western Red Spring (CWRS) wheat varied from location to location, but improved by 13 cents on average to sit at 81 cents to $1.17 per bushel above the futures as of Monday, when using the grain company methodology of quoting the basis as the difference between U.S. dollar-denominated futures and Canadian dollar cash bids.

When accounting for the currency exchange rates by adjusting to U.S. dollars, basis levels still improved by five to 10 U.S. cents per bushel compared to the previous week. However, the currency adjusted prices would put the basis at about US38 to 62 cents below the futures, depending on the location.

Tjaden Lepp attributed the improving basis to wheat export shipments that need to be filled.

Canadian wheat growers have little selling interest, considering the price of spring wheat, which has dropped below C$7 a bushel across Western Canada.

Grain companies are trying to entice farmers with higher prices.

“They can’t control the futures; the futures are going to do what they’re going to do,” said Mike Jubinville, market analyst at ProFarmer Canada. “What they can control is the basis premium that they’re willing to offer.”

Another factor moving basis prices higher is a weaker Canadian dollar, which keeps the country’s wheat more competitive in export markets.

Wheat futures are in U.S. dollars, after integrating currency conversion; as the loonie weakens, basis levels improve.

Despite a higher basis, wheat is still seeing significant bearish factors, highlighted by prices sinking to a five-year-low earlier in the month, which is what grain companies are trying to work against.

“The futures market doesn’t really care about dryness in Western Canada; it’s looking at the bigger issue, and there’s a lot of bearishness in the market,” said Tjaden Lepp.

Europe, Australia and the Black Sea region saw healthy spring wheat crops, which further pressured futures in the midst of a supply glut.

Things might start looking more bullish come 2016, said Tjaden Lepp.

“Based on what we’re seeing right now, there’s only enough spring wheat in Western Canada for exports to come in five million tonnes below last year,” she said.

Canada will need to ration wheat in order to meet demand, she said. “We’re not going to have enough supply to do as much as last year.”

It’s too soon to tell when, but at some point, she said, Canadian wheat will need to hit a healthy enough premium to ration demand, since the country likely can’t maintain the current pace of exports.

Jade Markus writes for Commodity News Service Canada, a Winnipeg company specializing in grain and commodity market reporting. Follow her at @jade_markus on Twitter.

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