May 31, 2012

 

Asian millers switch to corn as wheat prices rally

 

 

Following the benchmark wheat prices rallied to a nine-month high last week, for the first time in at least a year, Asian millers will replace wheat with corn in animal feed, dealing a blow to Australian wheat producers who have a record large crop.

 

Japan, the world's top corn importer, and South Korea, the No. three buyer, are expected to book more corn shipments from September, when the new US crop corn enters the market, traders said.

 

Higher demand for US corn in Asia is likely to support Chicago new-crop prices while a decline in the purchases of lower quality Australian wheat would pressure prices.

 

"The elevated corn price versus wheat over the past 12 months has been a key factor inducing a substitution away from corn into wheat," said Luke Mathews, commodity strategist at Commonwealth Bank of Australia.

 

"Given that these spreads are moving back into the favour of corn consumption, we believe there is a risk that the feed wheat consumption estimates the organisations such as the USDA have could prove a little bit optimistic."

 

The USDA has projected wheat use for feed and residual purposes at 230 million bushels in the year to June 2013, up 50 million from a year ago. Chicago Board of Trade wheat futures have been closely following the corn market in the past year as livestock producers replaced expensive corn with wheat in feed lots. But that trend is changing with the spread between front-month wheat and corn contracts widening to its highest since February 2011 last week.

 

Earlier this month, South Korean grain processors signed deals to import US corn at around US$275 a tonne, including cost and freight, for November shipments compared with US$285-290 being offered for Australian wheat. Australia is expected to end the current grain marketing year with a record wheat stockpile of up to 10 million tonnes, compared with 8.5 million tonnes a year ago and almost double the annual average of 5 million-6 million tonnes, according to analysts. The marketing year ends on September 30.

 

"For buyers, corn will be cheaper but they have already committed to supplies of Australian wheat over the next three months," said a Singapore-based trader. "So we are looking at potential change from August."

 

Exporters will have to reduce prices for the lower quality Australian wheat for it to compete with corn, traders said.

 

"It will have to be at least US$15 below corn prices on a delivered basis in Asia," said one Sydney-based broker. "We are expecting pressure on lower quality old-crop wheat from September onwards when US corn supply comes in."

 

Since the beginning of May, South Korean feed millers have bought at least 346,000 tonnes of corn, paying US$275.65 a tonne, including cost and freight compared to close to US$300 a tonne late last month. Japan, the world's biggest corn importer, booked half a million tonnes of corn earlier this month, taking 300,000 tonnes from Brazil and 200,000 tonnes from Argentina within a week.

 

Global wheat stocks should fall to a four-year low by the end of the 2012-13 season with the crop outlook dimming in the EU, Russia and Morocco, the International Grains Council said in a monthly update last week.

 

The IGC said global corn stocks, in contrast, should climb to a three-year high by the end of the 2012-13 season buoyed by record global production.