September 14, 2009

The spread between wheat and corn prices has narrowed substantially this summer, and both markets could remain under pressure as they compete for feed demand.

 

Since both markets made seasonal highs June 1, the spread between Chicago Board of Trade December corn and CBOT December wheat has shrunk to US$1.43 1/2 from US$2.53 3/4. Cash spreads have been even tighter.

 

A steep slide in wheat has brought it closer to the price of corn as weak global fundamentals weighed on the market. Ample world supplies and lacklustre export demand are fundamentally bearish for wheat, analysts said.

 

"I think the relationship between the wheat and the corn has gotten incredibly cheap for wheat," said Terry Reilly, analyst for Citigroup.

 

The US Department of Agriculture on Friday affirmed that world wheat supplies are hefty, raising its ending stocks forecast to 186.6 million tonnes from 183.6 million last month. That's up from 121.8 million tonnes two years ago, thanks to back-to-back years of strong production.

 

Weak wheat prices and the tight spread will be a "chain around the neck" of corn moving forward, said Mike Zuzolo, analyst for Global Commodity Analytics and Consulting. The grains are linked because both can be used for animal feed.

 

"If the corn is going to rally, it's got to absolutely have the wheat on its side going up with it," he said.

 

But a sustained wheat rally seems unlikely any time soon due to poor fundamentals, traders said. The US has struggled to maintain a strong sales pace amid competition for business from other countries with loads of wheat to move.

 

Total US wheat export commitments as of Sept. 3 were down 39 percent from a year earlier and 30 percent from the five-year average, according to the USDA's weekly export performance indicator. Commitments were 37 percent of the USDA's target for the year of 950 million bushels. In an average year, commitments would be 51 percent of the target, according to the USDA.

 

"Wheat's got some major obstacles ahead of it," said Arlan Suderman, market analyst for Farm Futures. "The bottom line is demand. We've seen the demand come back for soy. We're seeing a strengthening trend for corn. We've got a lot further to go in wheat."

 

Most-active CBOT December wheat is trading around US$4.60 a bushel, down more than US$2.50 from June. December corn is trading around US$3.20, down about US$1.50 from June.

 

Suderman agreed cheap wheat makes it tough for corn to sustain a rally. He said he expected the spread between the markets would continue to narrow until traders can take the "fixation off surplus wheat stocks."

 

Reilly said he expected the spread to widen in the long run, with wheat doing the heavy lifting to firm up its price. That will keep a lid on corn's upside potential, he said, unless neighbouring CBOT soy stage a rally that spills over into corn.

 

Cash soft red winter wheat prices have fallen below corn in select parts of the southern Mississippi River Valley, as growers are trying to unload surplus stocks at an unusual time of year, Suderman said. The most recent US SRW wheat crop suffered quality problems, prompting growers to push it into feed channels.

 

Shawn McCambridge, senior grains analyst for Prudential Bache, said a key to the relationship between corn and wheat prices in upcoming weeks will be the need to increase feed demand. With exports unlikely to climb, "the most likely avenue of tightening up the balance sheet will be domestic demand," he said.

 

"We'll be trying to tighten up that spread to where it makes it economical to feed wheat," McCambridge said.

 

Corn could be hard-pressed to close the gap by moving higher due to its own shaky fundamentals. Traders are widely expecting a very large, if not record US crop, and frost-free weather forecasts continue to bolster sentiment that a big crop may get even bigger.

 

Still, weakness in the wheat market won't necessarily hold corn hostage, some analysts said. Sid Love, analyst with Kropf and Love Consulting, said that even if wheat continues to sag, corn could still show some independence and rally, as it tends to be "the wheel around which others revolve."