By Casey Chumrau, USW Market Analyst
The Chicago Board of Trade (CBOT) nearby corn contract is currently trading higher than the CBOT wheat contract. This reversal of a historical trend has only happened once before in 1983. As a result, wheat industry stakeholders and grain market analysts around the world are paying close attention to the price spread between wheat and corn. And for good reason: the behavior of the corn market in recent months helps them understand the current wheat market.
On Wednesday, Oct. 26, the CBOT December corn contract closed at $6.37 per bushel, 18 cents higher than CBOT soft red winter (SRW) wheat. Additionally, the spread between the CBOT corn contract and the Kansas City Board of Trade hard red winter (HRW) contract and the Minneapolis Grain Exchange spring wheat contract has narrowed significantly. This reversal in relationship sent ripples through the wheat market and supports higher wheat prices.
Prior to 2006, the average monthly settlement price for the nearby corn contract hit $4 per bushels only three times, all in 1996. Since 2006, the average monthly corn price has broken $4 per bushel 30 times, peaking in April 2010 at $7.53 per bushel. At its basic level, the rise in corn prices is a classic supply and demand story. Demand for corn has grown significantly and the supply has not increased at the same pace, resulting in higher prices. In its October World Agricultural Supply and Demand (WASDE), the U.S. Department of Agriculture (USDA) estimated world corn consumption for 2011/12 at 863 million metric tons (MMT), 19% greater than the 10-year average and more than 2% higher than last year.
Feed use is traditionally the single largest demand on the corn supply. Over a 50-year period, U.S. corn feed use averaged 78%, according to USDA. However, this figure has declined each of the past 10 years, corresponding closely with rising ethanol production. The percentage of total U.S. corn consumption dedicated to feed has dropped from 74% in 2001/02 to an estimated 42% in 2011/12. In that same time, the percentage of U.S. corn production used for ethanol increased from 8% to 43%, according to USDA’s Economic Research Service. This means tighter supplies of corn for traditional feed and food consumption with prices rising closer to wheat. As a result, many feed buyers are substituting wheat for corn.
According to Oklahoma State University Agricultural Economist Dr. Kim Anderson, higher corn prices and feed grain substitution has an impact on all wheat prices because it is removing wheat from world ending stocks. In the October WASDE, USDA estimated a 21% increase in U.S. feed wheat use in 2011/12 compared to last year and a 12% increase worldwide. China is selling government wheat stocks to meet its animal feed demand triggered by tighter corn supplies and higher prices. USDA’s current estimate shows a 31% increase in feed wheat use in China this year over last.
Higher corn prices also lead to greater competition for planted area. In the last 10 years, as demand for corn has increased 19%, planted corn area in the United States increased 11 percent and wheat acreage fell 8%. USDA estimated that producers planted 91.9 million acres (37.2 hectares) of corn this year, a 4% increase from last year. Planted wheat acreage this year is an estimated 54.4 million acres (22.0 hectares), 2% greater than last year, which saw the lowest planted wheat acreage since 1969. Demand for wheat continues to increase, but lower planted area limits production and, therefore, U.S. and world supplies. Tighter wheat stocks mean higher prices. Competition for planted area will likely continue to increase if corn remains as lucrative.
The competition is not limited to the United States, however, as farmers around the world see higher revenue potential in corn and an opportunity to fill gaps in exportable corn supplies opened by increased U.S. domestic use. Reuters reported Wednesday, Oct. 26, that harvested corn area in Ukraine and Argentina—both wheat exporters—has increased 111% and 48% respectively since 2005.
Although corn market dynamics are not the only factor driving wheat supply, demand and prices, they are playing a significant role in determining today’s price behavior. As long as the spread between corn and wheat prices remains tight, the wheat industry would do well to continue closely monitoring the global supply and demand picture for corn.