Corn-wheat price relationship complicates wheat market

by World Grain Staff
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ARLINGTON, VIRGINIA, U.S. — The unusual market fundamentals for wheat, especially for U.S. wheat, in marketing 2015-16 remain bearish with the U.S. dollar hanging near its 12-year highs and freight rates spiraling to new lows each day, U.S. Wheat Associates (USW) said. To complicate matters, changes to the global corn supply and demand fundamentals now demand the attention of the world’s wheat buyers — and sellers — with the potential for  increased wheat feeding in the short term.

While the relationship between wheat and corn is complex, wheat markets tend to follow corn. The two commodities are somewhat substitutable in the feed grain markets (primarily for pork and poultry production), depending on their price relationship.

In a normal year, the world feed grain market consumes an average 19% of all wheat production and 68% of corn production, USW said. The wheat sold for feed establishes the price floor for wheat by consuming residual wheat stocks — standard grade wheat that is generally unsuitable for end-product food functionality. However, animal feeders will also increase wheat in their rations if the local price difference between wheat and its nearest substitute, in most instances corn, is narrow enough. This relationship is more apparent when winter wheat is dormant and other market fundamentals are relatively stable.  

The Chicago Board of Trade (CBOT) soft red winter (SRW) Wheat-Corn Intercommodity Spread monitors this price difference. The closer to parity corn and wheat prices are, the more attractive it is to feed wheat to animals. Wheat normally has a higher protein content than corn and thus is worth a bit more in a feed ration. In 2011-12, when the spread narrowed and then flipped, wheat feeding increased 3 percentage points from the five-year average.

While the CBOT wheat-corn spread monitors U.S. prices, buyers are independently tracking the wheat-corn spreads of different origins, which a rare feed wheat sale from Argentina to hog feeders in North Carolina highlighted recently. The same strong U.S. dollar that is making U.S. wheat more expensive overseas is making wheat from other origins, such as Argentina, less expensive for some U.S. livestock operators. As of Jan. 23, trade sources reported low-protein Argentine wheat prices at $4.35 per bushel free on board (FOB) and U.S. corn at $4.37 per bushel FOB, making the Argentine wheat-U.S. corn spread 2¢. For comparison, U.S. SRW at $5.61 per bushel FOB and U.S. hard red winter (HRW) at $5.81 per bushel FOB had wheat-corn spreads of $1.24 per bushel and $1.44 per bushel, respectively. At interior positions these spread can vary considerably: a feedlot in a wheat producing area may find wheat to be a bargain comparted to corn at its location.

Argentine wheat being cheaper than U.S. corn originating from the Gulf allows countries that would traditionally import corn for animal feed — Indonesia and the Philippines — to purchase wheat as a lower cost option. This is possible not only due to record low freight rates, but also because global wheat production is at a record high, while corn production fell 4% year-over-year to 968 million tonnes as a result of decreased production in exporting countries that account for 95% of global corn production. This decline put global corn production below global corn consumption, which grew to a record 974 million tonnes, up 13 million tonnes from 2014-15, USW said.

The full effects of corn consumption out-pacing production this year are still unfolding. However, U.S. Department of Agriculture (USDA) believes global corn exports will fall 18% year-over-year, which may provide an alternative home for some of the world’s abundant wheat.

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