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Northwest Iowa Dairy Outlooks

A local discussion of current science and issues concerning dairying in northwest iowa

D. Mark Welch asks “What has happened to the basis?” Basis is defined as the difference between the local cash price and the futures price (cash – futures = basis). This applies whether we are considering the cash wheat price at your local elevator or export bids at the port of Houston. Location and related transportation costs are usually considered to be the primary explanation for the basis level in a given market area. But other factors also have an influence on the basis. These include storage capacity, government programs, weather at harvest, and general market conditions.  Changes in the basis can often tell us about changes that are occurring in the overall level of demand in the market place1. $1.40. The wheat basis at the port of Houston this week is $0.35, only the second time since we have been tracking basis levels that this basis has been negative.

Supply and demand fundamentals for wheat point to weak basis levels, particularly in Texas. Harvested acres are up over a million acres from last year and the state average yield is expected to be 35 bushels per acre. This is just below the all time record yield of 37 bushels seen in 2007 (the last time the basis was this weak). Protein levels from hard red winter wheat are expected to be lower than normal this year removing a price advantage Texas wheat might have on the basis of quality.

Nationally and internationally wheat supplies are ample. U.S. wheat production has exceeded consumption the last two years and ending stocks are at their highest levels since the 1980s. World wheat supplies have recovered quickly from record tight stocks two years ago and are back to long term averages. U.S. wheat exports in the 2009/2010 marketing year hit a 25

year low and projections for 2010/2011 are basically unchanged. This puts back to back wheat exports at their lowest levels since the early 1970s.

An additional factor pushing this year’s basis levels to record lows may be the economic situation in Europe. Concerns over the abilities of several governments in the European Union to meet their debt obligations have weakened the financial situation, dampened expectations for economic recovery from the recent recession, and pushed the Euro to its lowest levels in over four years.

Many studies have confirmed the relationship between currency exchange rates and grain exports, particularly wheat

. The recent fall of the Euro versus the currencies of countries that import wheat has increased the price competitiveness of European wheat in world markets and made wheat from the U.S. less competitive.

Given the weakness in the Euro to this point, it appears U.S. wheat prices have fallen sufficiently to once again approach price competitive levels, at least back to where we were a few months ago. While other factors contribute to current weak basis levels at specific locations, this situation has been exacerbated by increased export competition due to exchange rate volatility. It appears that the U.S. wheat price has adjusted in an effort to once again be price competitive; additional weakness in the Euro will likely pressure U.S. wheat prices lower. Conversely, improvement in the overall economic situation in Europe and a strengthening Euro will be positive for U.S. wheat prices.

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