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Senior Contributor

Reverse positive wheat basis?

Oh yeah, there is such thing!!!!!!!! But it's invisible! Oh yeah! And it may affect a commodity near you if it gets exported.

 

First, I'm in an isolated regional wheat market that grows a specific kind of wheat for export (SWW) from Portland. However, we do increasingly grow other wheats because we can capture the wide basis between the Midwest price and coast price. Portland price for off loading all Midwest commodities is always at a very high basis to the Midwest (corn, wheats, soy - which we don't grow, yet).

 

But wait, there's more! Exporters for SWW have talked up the idea of imminent price collapse and reasons to be the sure to get something on the last boat out of town - all while building a $1 difference between producer price and FOB  (per bushel!) and reportedly turning away business. I can't imagine they are doing anything different for corn and soy for the Pacific Rim. And since they are servicing other markets out of other ports I would be aghast if there were nothing like this elsewhere.

 

Two possible reactions I guess, beside the obvious disgust of the misinformation battle. One might be, what me worry about a price collapse! There's a $1 cushion built in. Or, hey, if there is such a thing as demand rationing (for wheat it would be little) these guys are going to get the job done! Another issue is encouraging huge acres next year if there are places that have moisture to do so. Unless corn comes back strong - or soy.

 

But it reminds me of the Wall St mortgage paper fiasco. First Wall St invented the money machine: Write mortgages, securitize them and throw in a little quality property with all the junk to get a AAA rating. Sell them to buyers desperate not to miss out. Sell them insurance on the purchase (credit swaps - worthless). Then hurry, do whatever is necessary to write more mortgage contracts for securities fodder. Repeat ad nauseum.

 

What I mean is this. Sooner or later more commodity is needed to increase the return. Heat up the market. If the conveyer slows down pull the PNW 'lemon-lime marshmallow surprise' trick (pull all bids to drop the market and then run it up again with the cover story that 'we told you it might be your last chance!').

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Senior Contributor

Re: Reverse positive wheat basis?

Here's the meat of a message I received from a person in the industry.

 

"Probably no secret by now, but I can easily explain the $1.00/bushel price discrepancy you noted before harvest.  Export margins are at all time highs and the big boys are raking them in (more on corn and beans than wheat, though wheat is huge now too).  Portland can buy wheat at 6.75, offer it out at 7.75, and sell it.  Nothing to it.  Historically, 50 cents was unheard of, let alone a buck.  The surprise is that no one has broken ranks and jacked up their bid to do more at 50 cents (or whatever margin).  So far they are so busy they are turning away ships.  This is why Itochu has spent 300 million on a new PNW export terminal."

 


 


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Contributor

Re: Reverse positive wheat basis?

Export capacity at all US ports will be tight, but especially so in the PNW area....when capacity gets this tight, you are going to see some wide spreads on the front end margins....why? because if you are going to sell somebody nearby loading capacity you are then going to have to pay someone else money to wait.....so those big margins you are seeing really don't reflect reality, but moreso a very limited ability to do additional biz......

 

I would be interested in knowing what you are seeing for the margins 3-4 months in the future..

 

thanks

 

Ray J

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Senior Contributor

Re: Reverse positive wheat basis?

Ray, you said, "because if you are going to sell somebody nearby loading capacity you are then going to have to pay someone else money to wait....."  You'll have to explain that, because it seems counter intuitive. As long as the exporter is making a $1 a bu because of a long line up, I don't see any reason why the seller would be interested in paying anyone anything to wait. I can see the buyer hedging - or going somewhere else, or even paying the exporter for a promised supply. It wopuld seem logical that if the exporter wanted to hedge their bet for future supply then contracts for future delivery would proliferate. Nothing of the kind going on as far as I can tell. And not a strong tradition here.

 

Meantime, the exporters were talking down the situation, indicating nothing unusual was going on and representing business was lacksadaisical and sporadic to the up country crowd.. Of course, word is getting out. I will say that Scoular (major consolidator) is always in the lead with creative twists of phrase that could appear meant to deliberately mislead.

 

The future is somewhat clouded because of a long river shut down this winter, one of the main ave for sww. I would predict no slow down in sales, and exporter pre positioning up country - competition for volume when barges resume. That's been the pattern.

 

I see continued competition for immediate supplies.

 

 

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Frequent Contributor

Re: Reverse positive wheat basis?

I hate to say it, but the easiest way to make money is to take it from a farmer.  The same farmers that are falling over themselves to sell for the cheapest.  We could get that extra .50 or .60 cents easily.  The irony is that we could have such great bargaining power.  The sell for less attitude has been destructive for rural communities and families.  It's no wonder that the average age of farmers is almost 60, while practically an entire generation has been forced off the farm.

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Senior Contributor

Just to show how unique the PNW wheat market is

Finally. Egypt jumps into it's old stomping ground and buys quality SWW.


$7.45/bu price for fh Nov. I assume that's FOB.


Producer price, same port, same time? $6.80.


Houston, the PNW finally has a basis game, you just don't want to know what it is.

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Veteran Contributor

Re: Just to show how unique the PNW wheat market is

Equal to CBT 736 WZ. One wonders who figives advice to poor countriues like Egypt. They of anyone can least afford to overpay or get emitional and buy some cockmanny rally.

There does not seem to be any worlkd shortage of wheat. By the time Russia reopens exports, the market may be much lower.

Artifice.

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