Though Mom Nature always has the final say in how much wheat pasture is available, grain-market dynamics began playing a stronger role a couple of years ago with the commodity bubble. Now, it’s basis risk.
“The current market conditions have created additional basis risk for growers, because hedgers can no longer count on cash-futures convergence at delivery points,” says Art Barnaby, a risk management specialist with Kansas State University (KSU) Research and Extension. “If hedgers could count on the wide basis to remain, then efficient hedging could continue. One would just add 50¢ to the historical basis. The new source of risk in grain marketing is the increasingly unpredictable local grain basis caused by lack of convergence.”
In Kansas, for instance, as well as the Texas Rolling Plains, the difference between cash wheat prices in Kansas and July 2010 Kansas City Board of Trade (KCBT) wheat futures widened sharply in mid-June rather than moving toward convergence as the cash and futures prices normally do.
“The cash basis differential has widened to as much as $1.25-$1.60/bu. under futures in western Kansas and to $1.00-$1.20 under futures in central Kansas,” says Daniel O’Brien, KSU ag economist. “That’s as much as 55¢ to 60¢ wider than we’ve seen in June in at least the last 12 years.” As an example, he explains cash wheat prices at Hutchinson, KS, on July 19 were $4.84/bu., and $4.40/bu. at Colby. That same day, July 2010 wheat futures on the KCBT closed at $5.95/bu.
There are plenty of possible reasons. Barnaby and O’Brien have focused on how effectively the wheat futures delivery system has worked to allow arbitrage forces to bring about convergence between the hard red winter wheat cash and futures markets.
In the short term, O’Brien and Barnaby expect Kansas grain basis levels to remain wide because of a combination of wheat market supply and demand factors and the likelihood that KCBT Hard Red Winter wheat futures delivery mechanisms designed to bring about convergence of cash and futures prices are not functioning effectively. They say it’s possible that a combination of factors – including limited grain storage space in Kansas, difficulties in moving a sizable 2010 wheat crop into export channels, and prospects for large feed grain and oilseed crops in fall 2010 – may lead to wider-than-normal basis levels for fall crops as well.
That likely means some wheat producers may look harder than they have in recent years at running wheat cattle this fall. “Those of us who chase cattle will probably have more competition from grain producers who don’t typically chase them,” Stan Bevers, Texas AgriLife Extension economist, said at last week’s inaugural Cattle Trails Stocker Conference in Wichita Falls.
You can find more detail in the Grain Basis Issues section at www.agmanager.info.