Below is email from CEO of the Ks Wheat Commission

Subject: BASIS LEVELS

All,

As many of you know, basis levels are at the worst levels they have been in history. We have reports of -1.50 to -1.80 in Western Kansas and in Oklahoma and Texas. I suspect we will be seeing -2.00 basis levels in some places before this is all over.

Many of the calls I am getting from you guys start out with the fundamental question about this “Who can we kill?” That is a good question for sure….I wish there was a simple answer of who to blame. Below are some bullet points to what goes into basis and ways we are going to get out of this.

Key things factors in basis:
1) Supply and Demand (and quality of supply)
2) Rail rates (freight costs either rail or truck to destination)
3) Futures price

Supply and Demand:
The US Wheat Carryout situation for the past marketing year is nearly 1 billion bushels. This is near record levels only seen 4 times since the 1980s. Unfortunately, of that billion bushel carryout, a high percentage of it is lower protein wheat. So that is why there is such a lack of demand for the low protein wheat. This is a situation because of the low pro winter and spring wheat crops from last year compounded by fears of another low protein crop coming now. There are elevators in the state paying protein premiums, so please be aware of this when you take it to the elevator and try to know what protein you have.

But this is more than just a US large Supply, there are large supplies of wheat around the globe. Unfortunately, much of it is also lower protein/quality, and the US is being forced to compete against it.

As an example: For HRW wheat FOB the Texas Gulf to be competitive, today it would have to be $147.00 per ton. That equates to $4.02 a bushel in the boat. So to figure it back to “in country” you have to deduct Exporter elevation of 20 cents in and out, rail rate to the gulf approx 85 cents. And then say 10 cent elevation cost at the country elevator….that gives you a cash price of $2.87 a bushel with no margins included yet for 11.0 protein wheat. That is nearly a basis of -1.80 back to the farmer to be the CHEAPEST wheat in the world. Not much fun to think about, but it is a reality.

Rail Rates:
Single car shipping costs had a price increase as of June 1. Over the last five years, these rates have steadily increased and have hurt the grain elevators that do not have the capability to ship Unit trains or 100 car trains. We need to push back on this as it is hurting farmers in the country.

We are hearing of many elevators of canceling cars and freight they have bought in advance. They are doing this in response due to the lack of demand for wheat especially low protein wheats. In short, if elevators load out wheat right now, there are very bad bids for that wheat if any bids at all. Also, elevators that do not have to move wheat for fall harvest, will take advantage of big carrying charges on the futures board, and wait to sell/move wheat until later in the year when basis levels improve.

Futures Price:
Two years ago, because of very bad basis levels being paid for soft red winter wheat, the Chicago Board of Trade instituted “Variable Storage Rates” in the hopes that would help force convergence and the delivery market as a viable outlet for wheat to move. There is talk of potentially evaluating whether or not there are things that need to be tweaked with the KCBOT contract that may help with the basis issue. Maybe it is increased storage rates, forced load outs or some other mechanism to help with “convergence”, but discussions like these ongoing within the trade.

We will continue to monitor the situation and keep you updated.

For the record, the three years I spent as a wheat buyer, I hated times like this. Your elevators are full and you can only take so many railcars, and a guy you know and respect has loaded cars he can’t find a bid for…..all you can do is say sorry….I hated that feeling and it sounds like that is what is happening right now with our domestic market. This emphasizes how important it is to get a Gulf Export program going for low pro hard red winter wheat to help relieve the stressed market. We are working our exporters overtime right now to drum up business….

Hang in there and have a safe Harvest!

Justin

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Justin Gilpin
Chief Executive Officer
Kansas Wheat Commission and Kansas Association of Wheat Growers
-- Together, we are Kansas Wheat