At this writing, the Kansas City Board of Trade July March contract price is $0.16 higher than the KCBT March wheat contract price. The KCBT December wheat contract price is 33 cents higher than the July contract price and 49 cents above the March contract price.
These figures do not imply that the market is offering higher prices for wheat delivered in July or December. They only mean that the market will offer higher prices if wheat is delivered against KCBT futures contracts at the KCBT delivery points.
At this writing, forward contract prices that elevators are offering for wheat delivered in the June/July time period are lower than current cash prices. This difference is reflected in the basis. The basis is defined as the KCBT futures contract price minus the local cash price.
Note that some elevators do not offer a harvest forward contract. Also some elevators may be offering basis above or below the basis used in this article. In each area, plus or minus $0.10 includes most basis.
The current wheat basis in most of Oklahoma is a minus $0.10 and the basis is a minus $0.45 in the Texas and Oklahoma Panhandle regions. At this writing, cash wheat prices are about $6.75 ($6.85 KCBT March - $0.10 basis) in most of Oklahoma and $6.40 in the panhandle region.
Elevators in southern Oklahoma are offering a minus $0.85 basis for 2012 harvest delivered wheat. Central and northern Oklahoma elevators are offering a minus $0.45 basis, and Texas and Oklahoma panhandle elevators are offering a minus $0.65 basis for harvest delivered wheat.
At this writing, the KCBT July wheat contract price is $7. The harvest forward contract price is $6.15 ($7 - $0.85) in southern Oklahoma, $6.55 and $6.35 in the Oklahoma and Texas panhandle region.
Southern Oklahoma elevators’ current basis of minus $0.10 and a harvest basis of minus $0.85 may reflect the condition of the wheat crop in southern Oklahoma compared to central and northern Oklahoma. Southern Oklahoma elevators may not want to take the risk of forward contracting producer wheat, hedging the wheat contract, and then not receiving the wheat at harvest.
In early January, 2011, the wheat basis in most of Oklahoma was minus $0.90, and the panhandle basis was minus $1.35. The KCBT March contract price was around $8.75, so cash prices were between $7.40 ($8.75 - $1.35) and $7.85 ($8.75 - $0.90).
In early January, 2011, the forward contract basis for 2011 harvest delivery was minus $0.95 in southern Oklahoma, minus $1.05 in central and northern Oklahoma, and minus $1.40 in the panhandle region.
In late June, 2011, the KCBT July wheat contract price was $7.40 and the basis were minus $0.60 in southern Oklahoma, minus $0.45 in central and northern Oklahoma, and minus $0.70 in the Texas and Oklahoma panhandle. The actual June 2011 basis, compared to the basis offered in January, was about $0.35 higher in most of Oklahoma and $0.70 higher in the Oklahoma and Texas panhandle regions.
Given that the current basis is about $0.80 higher than last year and that the current harvest forward contract basis is about $0.70 higher than last year, the demand for milling quality hard red winter wheat is expected to remain relatively strong.
“Will the basis improve the $0.30 to $0.60 like it did last year?” Low yields and production may lead to a higher basis. High yields and production may lead to a steady to lower basis.
Given the 2012 production risk and a lower forward contract basis compared to the current basis, now may not be the time to forward contract much wheat. If you want to price wheat for June delivery, hedges may work better.