Wheat shares corn’s price, demand at elevator

Even in a year in which Russia, Australia and Canada all produced record wheat crops, United States wheat export levels to China were up by 2.7 million metric tons above last year’s totals. With continued tight supplies of corn and soybeans and strong demand from China forecast to continue, high prices of wheat as well as corn, sorghum and soybeans are expected to continue.

The overall boom in grain commodity prices has tied together corn and wheat prices as both corn and soybean stocks tighten. “The main reason for the current price of wheat is the current price of corn,” writes commodity analyst Oleh Kombaiev. Among the three commodities wheat, corn and soybeans, “Corn is the driver … and China is the driver for corn,” said Peter Meyer, head of grain and oilseed analytics at S&P Global Platts. The same is true of sorghum prices, which also track corn prices during period of strong export demand.

Chinese demand

The demand is part of China’s voracious appetite for grains. China is the world’s largest wheat producer and holds roughly half of the world’s wheat supplies in storage—somewhere between 130 million and 150 million metric tons, according to Steve Mercer, vice president of communications for U.S. Wheat Associates, the wheat marketing group that works with the U.S. Department of Agriculture to promote American wheat abroad.

The USDA’s Foreign Agricultural Service’s April report noted that global wheat production was “marginally lower” as downward revisions for the European Union, Ethiopia and Japan more than offset a larger crop in Argentina. Global consumption, though, was raised as larger feed and residual use in China more than offset the European Union reduction. Global stocks were forecast lower, mostly because Chinese stocks were forecast to decline for the first time since 2012-13.

Long term, China is recovering from the COVID-19 pandemic faster than any other economy, if you believe its own metrics. The recovery is leading to a reopening of restaurants and a boom in demand for quality animal proteins.

Mercer points out that the Chinese government controls which feeds are available to livestock producers by its control of prices and availability. Wheat’s use as an animal feed is usually small and determined by its relationship with the price of corn. When corn goes high, the government may make some lower-quality reserve wheat available as an acceptable feed. Most imported wheat in China goes to human consumption.

According to the USDA, “Record volumes of old rice and wheat stocks are entering feed mills and deep processing plants as substitutes for high-priced corn. Industry members forecast the corn supply-demand situation [in China] will not change until late calendar year 2021 or 2022 at the earliest.” Official figures indicate that the Chinese swine herd is at 92% of its pre-swine-flu levels, but local outbreaks of ASF continue to be reported.

South American drought

Right now is the height of the South American harvesting season, which would normally reduce demand for American feed grains. But drought conditions in Brazil and Argentina have led to concerns and logistical problems. The USDA reports that during the last several weeks, declines in water levels of the rivers of Argentina, Brazil, and Paraguay have forced barges to lower their capacities to avoid grounding. These lighter barge loads have slowed the flow of corn, soybeans and soybean meal to key export locations.

In Paraguay, parts of the Paraná River (a major soybean artery) have been closed to barges since the beginning of April. Since Argentina and Paraguay depend more on barges than Brazil, which mostly relies on rail and truck for agricultural transportation, supply disruptions from these key South American sources could shift global buyers to pull from U.S. stocks instead, the USDA said.

Wheat as feed

It’s the current high price of corn in the U.S. that has sparked wheat’s increasing use as a feed grain in this country, too, during the marketing year. During normal years, the U.S. hard red winter wheat crop is more or less evenly divided between domestic and foreign flour mills, destined for human consumption. The USDA is forecasting ending stocks of 23.18 million metric tons for the 2020-21 marketing year, which should normally moderate wheat prices. But low carryover and concerns over possible drought in wheat-growing areas have kept prices high, nevertheless.

The cash price of hard red winter wheat has declined below 105% that of corn in some parts of the Midwest, according to according to Dan O’Brien, professor of agricultural economics at Kansas State University, who told High Plains Journal, “The [domestic] wheat market is being affected by high corn prices.” One hundred and five percent is considered a “rule of thumb” below which wheat becomes as or more economical as an animal feed than corn. Many of the prime wheat-growing areas in Kansas and Nebraska are located close to feedlots, which adds a logistic advantage to wheat as a feed this year.

It’s not the current price alone driving the trend, but the expectation that the relative price outlook will continue. Feedlot managers don’t like to switch feeds too often, said Jim Mintert, director of the Center for Commercial Agriculture at Purdue University, because that can lead to decreased weight gain and performance. For wheat to replace corn as an animal feed, livestock growers have to be confident that its price will remain attractive relative to corn for an entire finishing cycle of beef cattle.

Corn buyers are also having to compete with ethanol plants, which are gearing up to meet what is expected to be a huge summer demand for blended gasoline as people resume normal life—and more driving—in the wake of increasing vaccinations. Ethanol is expected to consume about 5 billion bushels of corn this year, according to the USDA.

Apart from price, weather uncertainty is contributing to keeping wheat prices high. There is still some uncertainty about the ultimate size of the hard red winter wheat crop, and how much damage was done by a series of late season freezes in the central and southern Plains, said O’Brien. The May 3 wheat Crop Progress Report from the USDA showed only 48% of winter wheat in 18 selected states as rated as good or excellent, down from 49% the previous week and 53% in the previous two weeks.

One contributor to wheat’s longer-term export performance is a shift in the eating habits of some southeast Asian countries, with wheat-based noodles and baked goods replacing more rice-based products in some Asian diets, said Mike Spier, vice president of overseas operations for U.S. Wheat Associates. In the Philippines, for example, about 90% of milling wheat is imported from America, according to Mercer.

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Farmers don’t have to make decisions about hard red winter wheat plantings until the fall, and a lot can happen with prices by then. Combined spring and durum wheat plantings for 2021-22 are expected to be reduced on higher expected net returns for corn and soybeans in the northern Plains, according to the USDA. But it looks as if wheat farmers can look forward to high prices for the foreseeable future.

David Murray can be reached at [email protected].