As Wheat Trading Shifts, Corn Offers Price Signals

November 1, 2011 08:51 PM

Wheat markets may stay in the shadow of corn this fall as strong competition for wheat export sales offsets light farmer selling.

“The story on the spring wheat side is not a lot of demand, but it's been the same story since harvest,” says Tim Emslie, research manager at Country Hedging, Inver Grove Heights, Minn. “The farmer is waiting. Whatever he wants, he doesn't like what he's seeing.”
Last week's monthly market report from the International Grains Council reads like a good news-bad news story, suggesting limits to the upside:
  • The global balance sheet for all grains loosened in the past month but ending stocks still are expected to decline for a second straight year.
  • World wheat consumption is expected to rise faster than normal in 2011-12, but supplies should be ample from the second-largest harvest on record.
  • Food use forecasts for wheat have risen in the past month, while feed and industrial use projections are down from last month but still up from last year.
  • Growth in global wheat consumption in 2011-12 is expected to be about twice the average pace of growth in the past decade, but carryover likely will exceed 200 million metric tons for the first time since 2001-02.

Black Sea competition up

The rebound in production and exports form the Black Sea region – mainly from Russia – has been a key factor in export competition.
“I can't remember the last time an Egyptian tender came our way,” says Brian Hoops, president of Midwest Market Solutions, Yankton, S.D. “Demand probably will be hurting for several months.”
USDA projects U.S. total wheat exports will fall in 2011-12 to 26 million tons, after spiking to nearly 36 million last year. The forecast for Russian exports is up to 18 million tons, in line with Russia's export volume before drought slashed its exports last year to just under 4 million tons. Kazakhstan and Ukraine are also headed toward big recoveries in their exports, while EU-27 shipments are falling.
Export market shares to the Middle East have shifted quickly.
“The biggest impact for now in wheat is the return of Russia and Ukraine to the market,” says Steve Mercer, communications director at U.S. Wheat Associates, Arlington, Va. “Last year, both were essentially out because of drought. But their crops were quite good. They have wheat to sell and they're selling it.” Those sales are at lower prices than U.S. exporters can meet, and the Black Sea countries have a freight advantage to the Middle East.

Demand steady in Middle East, Japan

Middle Eastern demand has held up well this year despite political turmoil. Early this year, upheaval in Egypt worried wheat traders.
However, Mercer notes that many Middle Eastern countries continued to provide subsidized bread for their people. “They have done a very good job of managing that,” says Mercer.

USDA reports Egyptian wheat imports worked higher from 7.7 million tons in 2007-08 to 10.6 million in 2010-11, and projects 10.l5 million tons this year.
Also early this year, Japan's earthquake and tsunami raised market concerns about shipments to that country.
“They managed extremely well,” says Mercer. “Our sales to Japan have not missed a beat.” USDA data show that Japan's wheat imports stayed in a range of 5.2 million to 5.8 million tons for several years, including last year at the high end of the range.

Demand for U.S. wheat slips

Total global demand also is holding up well, but demand prospects for U.S. wheat have eased. USDA's October supply-demand estimates reduced the projections for domestic and export demand from September estimates. Projected stocks for 2011-12 are still down from a year earlier for Hard Winter and Hard Spring wheat, but up for Soft Red and White wheat.
Chicago Board of Trade nearby futures on Soft Red Winter last week traded at a discount to nearby corn futures, as they did August. Wheat futures settled Oct. 28 at $9.205 in Minneapolis, $7.38 at Kansas City, and $6.445 at Chicago. December corn futures settled the same day at $6.55.

Reports of wheat feeding vary

How much wheat is going into feed domestically and internationally is an open question. Many analysts had expected to see indications of strong feed use in USDA's September Grain Stocks report, but were disappointed. USDA's October supply-demand estimates put feeding this year at 160 million bushels, down from the 240 million bushels USDA projected in September but still up from 132 million last year and 150 million two years ago.
The International Grains Council last week cited strong demand for Black Sea feed and milling wheat, and said price competition from lower-grade wheat could limit total use of corn this year. USDA's latest global estimates put total world feed demand for wheat at 125.5 million metric tons, compared with 112.6 and 115.7 million in the past two years.
Casey Chumrau, market analyst at U.S. Wheat Associates, notes that wheat historically traded higher than corn because of wheat's use for food rather than feed. However, ethanol demand has driven corn prices higher in recent years and the growth of the middle class in developing countries added support to prices.
Last week, says Chumrau, the China National Grain and Oils Information Centre said China “will import 1.5 million tons of wheat in 2011-12, up 90 percent from last year, to take advantage of lower international wheat prices to meet rising feed demand and to rebuild reserves.” USDA pegs China's total wheat imports this year at 1 million tons.

Price signals from corn

“Feeding is happening,” says Emslie at Country Hedging. “Our contacts in the Southern Plains say there's wheat feeding going on there.” Some reports indicate basis on higher protein wheat has risen, possibly to help keep it out of feed, says Emslie.
Hoops at Midwest Marketing Solutions expects wheat that is not high-quality will be pushed into feed rations.
Given the relatively weak performance of wheat markets, Hoops says, “The best prospect for a wheat price rally is corn. Watch the corn price for signals on what the wheat markets are going to do.”

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