Hedging using a basis versus Australian Wheat futures

  • 13 Jan 2020
  • By Paul Wightman and Cameron Liao

A series of poor wheat harvests in Australia have created supply shortages and lower exports, which in turn have led to increased price volatility in Australian wheat prices and greater risk of higher purchase costs for end-users (see Chart 1). Asian millers, who tend to agree fixed-price contracts with suppliers in advance of the delivery of Australian wheat, are exposed to these fluctuations in price. This article shows how millers can use basis trading in CME Group financially-settled Australia FOB Wheat futures to hedge exposure to Australian physical wheat prices.

Chart 1: Australian FOB wheat cash prices

Source: S&P Global Platts data

Basis Trading

Basis trading, or the buying and or selling of a commodity in a specific location priced against a recognised futures price, is a well-known concept in agricultural markets.

More specifically, basis is negotiated as a premium or discount to the futures. The basis takes account of variables such as transportation, handling, storage, quality and currency, as well as local supply/demand factors. A discount or negative basis is where physical prices trade under the futures, while a premium or positive basis trades over the futures. The basis value can be fixed by both parties at the time of agreeing to the trade or left to fluctuate from the time of the trade to the delivery of the physical wheat.

Asian millers that purchase Australian wheat can use the futures coupled with an agreed basis that is negotiated between the seller and the buyer to hedge price risk. Related futures and physical prices typically move up and down together, enabling hedging to occur. With a basis trade, only the difference in price between the physical price and the related futures needs to be agreed between the buyer and seller.

Purchasing physical shipments of Australian wheat using futures plus an agreed basis enables buyers to use the Australian Wheat futures to hedge price exposure to their local wheat prices either within Australia or to export destinations.

Hedging using basis for international Australian Wheat buyers

Indonesia is one of the largest buyers of Australian wheat with around 2.5 million metric tonnes (MT) imported in 2018. Rather than purchasing at a fixed price on a Cost Insurance Freight (CIF) basis delivered Indonesia and taking on the price risk inherent in a trade like that, an Indonesian miller could purchase Australian wheat at a basis to the CME Group Australian Wheat FOB (Platts) futures markets, thereby hedging its exposure to adverse price movements in the CIF delivered Indonesia wheat price.

As an example, say on March 1st, an Indonesian miller approaches an Australian wheat exporter to supply them with 30,000 metric tonnes to be delivered on Cost Insurance Freight (CIF) to Indonesia in September. The wheat exporter offers to supply wheat CIF Indonesia to the miller basis $25 per MT over the September Australian Wheat FOB (Platts) futures price, currently priced at $265 per MT. The miller agrees to the futures + basis offer. Buying this way would enable the miller to lock in the futures price (accounting for 90% of the purchase price), thereby hedging against an increase in the price of Australian wheat between March and September.

A basis contract of 30,000 MT CIF Indonesia September shipment is confirmed with the exporter at $25 + Australian Wheat FOB (Platts) September futures price ($265/mt at the time of agreeing the contract). On March 10, the miller decides that September futures prices are low enough and fixes the full quantity of futures i.e. buys 6001 lots of September futures at $255 per MT. As they near the shipment window of September, the miller decides to fix the futures price element of the contract to fully price their basis contract and executes an Exchange of Futures for Physical (EFP).2 on August 30th the miller submits an EFP to transfer its 600-lot long position in the September futures contract to the exporter at the mid of the range of that day, $290 per MT

The cash flow of the Indonesian miller


Physical wheat

Futures to hedge


March 1



Miller enters into a contract with the Australian exporter for 30,000 MT CIF Indonesia June shipment at $25 over September Australian Wheat FOB (Platts) futures (quoted at $265 per MT)

March 10


Miller buys 600 lots via a futures block3 trade of September Australian Wheat FOB (Platts) futures @ $255 per MT


August 30


Miller transfers its long position of 600 lots of September Australian Wheat FOB (Platts) futures via an EFP to the exporter @ $290 per MT


September 1

Australian exporter prepares to ship 30,000 MT of Australian wheat to CIF Indonesia @ $315 per MT

The Miller makes a gain of $35 per tonne on the futures



On September 1, the Australian exporter prepares to ship the 30,000 MT of wheat to the Indonesian miller at the agreed contract price of $25 (the basis) + $290 (September futures EFP price) = $315 per MT CIF Indonesia. Due to the gain of $35 made on the futures account, the net cost paid is $280 per MT, $10 below the futures price paid in March. If the Indonesian miller had waited to pay flat price for September delivery at the end of August, it would have paid an extra $35 per metric tonne, reflecting the amount by which the price of Australian wheat has increased between March and September. But by agreeing to hedge using the futures market plus the basis, they were able to delay their hedge in the Australian Wheat futures market and lower their net purchase price to $315 per MT.

Hedging futures using the basis versus flat price

One of the key advantages to trading futures is that it provides companies with the opportunity to fix the price of forward wheat purchases ahead of delivery. This means companies can build longer term relationships with their key suppliers having already fixed the wheat price in the futures market.

By using Australian wheat futures to hedge price risk, companies are able to focus on product quality with the basis negotiated in advance of the delivery. Volumes can be varied according to need and can be agreed over the short or long term. Once term wheat supply agreements are in place, millers are well placed to negotiate basis deals with flour buyers fixing contractual volumes over a defined time-period. Merchants are also well placed, knowing that they have long-term buying commitments from the mills.  

There are several additional benefits to using the Australian Wheat FOB (Platts) futures listed by CME Group:

  • The Australian wheat futures are cash settled without the risk of physical delivery.
  • Exchange-listed and exchange-cleared products provide the safety and security of central counterparty clearing hence removing counterparty risk.
  • Hedging is available for 12 consecutive months forward, allowing up to two crop years to be hedged and priced using basis.

For further information, please see our Australian FOB Wheat futures page.


  1. 1 contract of Australian Wheat Futures is 50 MT. 600 contracts = 30,000 MT
  2. Position trade governed by the rules of the Exchange (rule 538). The main benefits of trading an Exchange of Futures for Physical (EFP) is an effective way to close out a futures position at an agreed price between the two parties on an anonymous basis. From October 1st 2019 for a period of 12 months, CME Group extended the fee waiver program for Australian Wheat FOB (Platts) futures EFP fees for all market participants. Full details of the program can be found here.
  3. Australian wheat futures are commonly executed using the block trading facilities of CME Group. Block trades governed by Rule 526 are privately negotiated futures trades between two eligible counterparties which are submitted to CME Clearing. Blocks enable counterparties to execute a large transaction at a fair and reasonable single price. For further details on block trades, please contact your futures broker.

Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs)         within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible          to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion           of those funds should be devoted to any one trade because traders cannot expect to profit on every trade.

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The information within this communication has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this communication are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and superseded by official CME, CBOT, NYMEX and COMEX rules. Current rules should be consulted in all cases concerning contract specifications.

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