Saturday, April 14, 2012

Tight Corn Stocks, Not Quality Concerns, Pushing Wheat as Feed

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The 2011/12 marketing year will end May 31, a point at which most analysts expect the U.S. Department of Agriculture (USDA) to make only minor changes to its year-end supply and demand estimates. USDA did make mostly small changes to wheat production, world trade and beginning stocks estimates in its monthly World Ag Supply and Demand Estimates (WASDE) released April 10. However, USDA sharply increased projections of wheat used for feed. Generally, a spike in feed use would indicate quality issues, but other market factors are driving the feed wheat use higher than ever this year.

Driving feed wheat demand is the very tight supply of corn. Despite five consecutive years of record corn production, projected 2011/12 world ending stocks are 2 percent lower than last year and 7 percent lower than the five-year average. USDA currently projects U.S. ending corn stocks down 29 percent in 2011/12 to 20.3 million metric tons (MMT), 46 percent below the five-year average of 37.8 MMT.

Historically, about 70 percent of total world corn consumption is utilized as feed. However, the increase in total demand for corn, including biofuels, limits the amount available this year for feed. The lower supply of corn for feed and relatively high corn prices has driven livestock owners to look to alternative feed grains.

The April WASDE indicated that USDA expects wheat will meet a large portion of the unmet feed demand. USDA increased projected world feed wheat use by 7.0 MMT in April to a record 138 MMT, 5 percent greater than the previous record set in 1990/91 and 22 percent greater than the five-year average. Tight corn supplies in China, the world’s largest feed grains consumer, have led to the current estimate of 19.5 MMT in feed wheat use this year, nearly doubling the previous record.

USDA also increased projected U.S. feed wheat use by 950,000 MT to 4.90 MMT, 37 percent above the five-year average. Kim Anderson, agricultural economist at Oklahoma State University, attributed the increase to the tight U.S. corn stocks. Anderson noted that the United States has plenty of wheat available for all uses, but demand dynamics may pull more of this high quality wheat into the feed market.

Looking at the futures market, the spread between wheat and corn has tightened significantly the last few years. Historically, the three major wheat futures markets have held a premium to the Chicago Board of Trade (CBOT) corn price. However, on multiple days in the last year the CBOT soft red winter (SRW) futures contract closed at a discount to CBOT corn. For example, the CBOT corn contract closed 8 cents higher than the CBOT May SRW contract on Wed. April 11. Analysts also are watching the spread between CBOT corn and Kansas City Board of Trade’s (KCBT) hard red winter (HRW) contract. To date, KCBT has never closed lower than CBOT corn, but KCBT closed Wednesday with an 8 cent premium to CBOT corn and the spread April has been as low in as 4 cents. The tightening of the price spreads makes wheat a more viable option for feed use.

Even though USDA lowered projected world wheat ending stocks in April by 3.3 MMT to 206 MMT, it will be the fourth largest carryover supply on record and 25 percent greater than the five-year average, if realized. In the United States, estimated ending stocks would decrease 870,000 MT, an 8 percent decline from last year, but still 22 percent above the five-year average. The United States continues to have an abundant supply of wheat available at competitive prices to meet the world’s demands.

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