Friday, October 22, 2010

Tight Corn Supplies Drive Wheat Prices Higher

Chad Weigand, USW Market Analyst reports in the recently released Wheat Letter that "Back in the July 21 issue of Wheat Letter, we wrote about world wheat prices surging with news of the Russian drought. We also suggested that it would be a good idea for wheat buyers to watch the corn market, noting that the run-up in wheat futures actually began after the U.S. Department of Agriculture (USDA) reported a tightening in corn stocks. An additional decrease in corn stocks from any future weather issues or continued demand growth from China could push corn prices higher and pull wheat along with it,” we said.

USDA’s corn market assessment in its Oct. 8 World Agricultural Supply and Demand Estimates (WASDE) has had exactly that effect on wheat prices. USDA surprised the trade by projecting 2010/11 U.S. corn ending stocks at 22.9 million metric tons (MMT), falling well below average trade estimates of 29.2 MMT. If realized, this would be a 47 percent decline from last year and the lowest level since 1996/97. Global ending stocks are also expected to decline, falling 11 percent from last year to 132 MMT. With the ever-growing corn demand projected at a record 835 MMT, the global stocks-to-use ratio stands at 16 percent, the second lowest level since 1974/75. The stock situation in the U.S., which accounts for roughly 40 percent of global output, is especially tight. USDA projects the U.S. corn stocks-to-use ratio at eight percent, the second lowest level on record.

The bullish reaction in corn has spilled over into wheat, a market that was already factoring in increased overseas demand for U.S. wheat. Corn supply and demand remains a major factor for wheat. In its daily “Commodity News for Tomorrow,” CME yesterday quoted an analyst saying, "The only reason that wheat is up is because corn is up. We don't have a shortage of wheat." Between the WASDE report on Oct. 8 and Oct. 20, corn futures prices climbed 12 percent to $5.73/bu and wheat gained nearly five percent. The CBOT December wheat contract closed at $6.83/bu yesterday. The spread between corn and wheat in the U.S. cash markets is even tighter. While feed demand for wheat could increase locally, if the spread stays narrow up to corn planting time in 2011, the long-term competition for acres between corn and wheat would take on more weight.

Writing for World Perspectives, Inc., this week, analyst Mike Krueger estimated that 2011 corn planted area will have to reach 95 million acres (38 million hectares), assuming a yield of 160 bushels per acre (about 10 metric tons per hectare), if U.S. ending stocks are to reach a more comfortable level of 33.0 MMT. This would translate to the largest corn planted area since 1944 and increase the chance that the 2011/12 and 2012/13 wheat crops will lose planted area to corn. Krueger is President of The Money Farm, a grain marketing advisory firm based in Fargo, ND.

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