March 8, 2011

 

Asia's wheat prices may rise to widen price gap with corn

 

 

Asia's wheat prices are likely to rise this week to widen the premium over corn, as the difference between the prices of the two commodities is at an unusually low level.

 

The spreads between wheat and corn futures for the most active contracts on the CBOT have narrowed to less than US$1.0 a bushel from US$1.77 a bushel in mid-December.

 

Asian animal feedmakers' interest is definitely turning to wheat from corn, said a Ho Chi Minh City trading executive. Australian feed wheat on a delivered basis is more than US$50 a tonne cheaper than US corn for Southeast Asian destinations, he said.

 

Analysts said that either corn prices have to come down or wheat may rise to bring the spreads between the two grains to a more acceptable levels.

 

"Corn is likely to move sideways this week while wheat may make some gains," said Koname Gokon, deputy general manager at Japanese commodity brokerage Okato Shoji Co.

 

Wheat usually sells at a premium to corn because food-grade grain would otherwise be used for animal feed, creating distortions in the market.

 

However, ample supplies of wheat in Australia and the US and dangerously low levels of corn stocks have narrowed the gap between their prices.

 

The outlook for grains including both corn and wheat this week is bullish, said Hiroyuki Kikukawa, general manager for research with Nihon Unicom Inc., a Japan-based commodities brokerage.

 

The corn futures contract for May delivery on the CBOT is currently around US$7.33/bushel and wheat futures are at US$8.32/bushel. Most traders expect wheat to rise to US$8.40/bushel, while corn is likely to trade between US$7.30 and US$7.42/bushel.

 

Due to tight inventories of corn, it is unlikely for corn prices to show any significant downward correction, Gokon said.

 

Unlike the global wheat market, where there are several major exporting countries, bulk of the corn trade is undertaken by the US.

 

The significant lowering of corn yields in the US has disturbed its traditional relationship with wheat, said a Singapore-based executive at a global trading company.

 

US shipped almost 59% of global corn exports in the year to June 2010, according to the estimates of the International Grains Council, but its market share is projected to decline by five percentage points in 2010-11 because of a 5% decline in the country's output and strong domestic demand to make ethanol.

 

Corn for August shipment from the US Gulf coast is now offered at US$365-$370/tonne, basis cost and freight, Japan. In contrast, Australia has sold feed-grade wheat to Southeast Asian countries at prices of US$280-$295/tonne, cost and freight, for shipment in the first half of 2011.

 

Last week, even Canadian feed wheat was purchased by South Korean buyers at US$308.50/tonne, C&F, for cargo arrival by end-June.