At this writing, the Texas Gulf wheat basis is 23 cents compared to last year’s 55 cents and the five-year average of 53 cents. The cash wheat price is determined by adding the basis to the KCBT December wheat contract. Thus, the cash wheat price at the Texas Gulf is about 30 cents lower because of the weak basis.
Oklahoma and Texas interior wheat basis are about 25 cents lower than last year and about 23 cents below the five-year average. The lower basis may be caused by higher transportation costs, lower quality wheat and higher world wheat prices.
Wheat futures contract prices are used by the market to establish a “base” price. For example, the KCBT December contract price represents the price of number 2 grade wheat to be delivered at a Kansas City elevator in December. The basis adjusts the base price for time (September rather than December), location (Enid, Oklahoma; Amarillo, Texas; Texas Gulf, etc.) and quality (non-grade factors such as protein).
Wheat is shipped by truck, rail and barge to domestic flour mills and export ports. Higher fuel and lubricant costs have results in higher costs in all three transportation modes. The fact that the U.S. economy has been growing has also resulted in increased demand for shipping and higher prices.
Higher demand results in higher costs. New equipment must be purchased. New employees must be hired and trained. For example, you often see “Drivers Needed” signs with an 800 number on the back of truck trailers.
Barge (river) shipping has been reduced because of flooding. Flooding temporarily stopped river traffic on the Arkansas River system. Also, parts of the Arkansas River system have been silted-in, which is limiting some barge traffic. Lower barge traffic increases the demand (costs) for truck and rail, and results in barge equipment being out of position.
KCBT wheat contracts require US Grade number 2 or higher wheat. Number 2 wheat requires 58 pound test weight and has limits for damaged kernels and foreign material. Rain during harvest lowered the average grade and non-grade factors for hard red winter wheat and some shipments are closer to the grade limits than normal. Thus, number 2 wheat may have lower milling characteristics than US number 2 wheat whose characteristics are at the upper grade limits. This lower value is reflected in the basis.
Wheat prices in Paris, France are at record levels. World wheat prices are relatively high. Total hard red winter wheat that has been sold for export is 176 percent higher than last year. This has resulted in relatively high KCBT wheat futures contract prices.
Wheat merchandisers have sufficient amounts of wheat to meet export demand and may not want to own more wheat. The wheat will be needed later, thus relatively high futures contract prices. Since buyers do not need additional wheat, they lower the basis signaling producers to maintain ownership.
Another factor is the anticipated 13 billion bushel, record corn crop. Rail and barge equipment is being placed in position to handle this massive crop. This equipment is not available to ship hard red winter wheat and results in increased transportation risk. Higher risk results in a lower basis.
Ethanol plants throughout the Corn Belt have caused changes in the transportation system. The rail, truck and barge systems are relatively efficient and will go to the highest bidder. This sometimes results in shortages in some areas and often in higher costs.
Higher costs are allocated in the market in the form of higher prices to consumers and relatively lower prices to producers. The goods news is that the current wheat price was lowered from about $6.20 to $5.90, rather than from $3.50 to $3.20.