June 7, 2012

Corn to regain demand from wheat as prices fall

Due to slumping prices spurred by record world production, corn could soon regain demand from the livestock industry from wheat, according to the International Grains Council.

July-delivery corn was as much as US$1.015 a bushel cheaper than wheat last month on the Chicago Board of Trade, the biggest discount since March 2011, Bloomberg data show. In June 2011, hot, dry weather sent corn to a 40.5-cent premium over wheat, the highest for a most-active contract since 1959. The two grains averaged near parity for the eight months through the end of April, before corn resumed a discount in May and closer to the price relationship it's had with wheat in the past 10 years.

Cheaper corn costs in the 2012-13 crop year may spur livestock producers worldwide to feed 515.4 million metric tonnes of the grain, the most on record and 5.3% more than a year earlier, according to the IGC, which hosts its annual outlook conference tomorrow in London. The group expects wheat feed use to be 128.8 million tonnes in the upcoming crop, down 9.2% from a record this year. The 2012-13 crop starts July 1.

"There will be a lot more corn in the world in the coming year, so corn may recapture some of the demand wheat has taken," Amy Reynolds, an IGC senior economist, said by phone from London last week. "We're assuming a fall in feed wheat use and a relatively large increase in use of corn as feed."

Chicago corn futures plunged 12% last month as both the IGC and the USDA issued forecasts for record world output, while wheat touched an eight-month high May 21 as dry weather threatened crops from Kansas to Russia. Food prices globally at the end of April were 10% lower than the record in February 2011. The Standard & Poor's GSCI Index of 24 commodities dropped 13% in May.

Farmers worldwide may harvest 913 million tonnes of corn in the marketing year that begins July 1, 5.4% more than a year earlier, the IGC said May 24. The US, the world's biggest corn grower and consumer, may produce a record 355 million tonnes. The USDA estimates that world output may total 945.8 million tonnes, and pegs US production at 375.7 million, as yields rebound after hot, dry weather cut the harvest last year.

Ninety-seven percent of the US corn crop had emerged from the soil as of June 3, compared with a previous five-year average of 83% for the date, the USDA said June 4. Warm, dry weather allowed farmers to accelerate planting at a faster-than-normal pace this year, helping spur the USDA to project yields of 166 bushels an acre, the highest on record dating to 1866.

"The yields the USDA is assuming are more than doable, but the issue is whether crop conditions will stay as favourable as they have been for the rest of the season," Reynolds said. "There is a difference of opinion about how good yields may be for this season. We're taking a more cautious viewpoint than the USDA is doing."

Corn for July delivery, the most-active contract, traded at US$5.805 a bushel at 12:06 p.m. today, 6.5% cheaper than wheat for the same delivery month at US$6.21. Macquarie Group Ltd. expects corn to average US$5.87 a bushel in 2012, while wheat may average US$6.16 a bushel.

Global wheat output may total 671 million tonnes in 2012-13, down 3.5% from a record 695 million a year earlier, the IGC estimates. Dry weather in parts of Europe, former Soviet Union countries and the US spurred the group to revise its forecast down from 676 million a month earlier, Reynolds said.

Inventories left over from last year's record harvest mean world supplies of wheat will still be ample, said Chris Gadd, an analyst for Macquarie in London. US corn supplies will be limited until the harvest starts in September, which may underpin demand for feed wheat in the next three months, before corn consumption accelerates, he said.

The USDA expects US corn inventories at the end of the crop year Aug. 31 to drop to 21.6 million tonnes, the lowest since 1994, before rebounding to a seven-year high by the end of the following season.

"Once we get the corn crop harvested, we expect wheat's inclusions in the feed ration globally to fall significantly," Gadd said by telephone May 31. "We won't need to be feeding nearly as much wheat."