U. S. livestock producers may begin injecting more wheat into their feed after its price premium to corn hit its lowest level in three years and a government report revealed a radically tighter corn supply.
Wheat is typically a costly feed alternative to corn, but the spread between the two narrowed to as little as 89-3/4 cents on June 9, the tightest since April 2007, piquing the interest of cattle and hog farmers who generally resist making any sudden changes in feed components based on short-term prices.
Spreads quickly widened over the next few weeks on concerns about the protein content of this year’s wheat crop, but pulled in again following the June 30 U. S. Agriculture Department reports showing farmers planted less corn than expected and stockpiles were far smaller than thought.
“In general, they are reluctant to do that so (the narrow spread) probably has to be in place for a while,” said Elaine Johnson, analyst with CattleHedging.com,a risk management service company. “Now with this acreage report and this stocks report on corn, I suspect that may speed up the process.”
Quick changes to diets can affect the health of cattle and impede weight gain. That can wipe out any financial benefits of a switch, so producers typically shy away from changing the makeup of their rations on a sudden or short-term basis.
On the cash markets, wheat is already competing in some areas with corn. After recent USDA reports, which also showed limited export demand for U. S. wheat, a switch in rations may become more economically viable on a longer-term basis.
However, wheat prices unexpectedly rallied in the latter part of June after rainy weather in Canada put a question mark over its crop, aiding a market that was sinking toward its lowest level since 2006.
“The wheat cushion, make no mistake about it, globally is still fairly ample but we are nipping at the edges of this surplus,” said Rich Feltes, senior vice-president of MF Global Research in Chicago. “We do not have a full green light as yet to be feeding a lot of wheat.”
But if it occurs, the change in feed rations could reduce some demand from end-users who consume about 40 per cent of the nation’s corn and boost the percentage of U. S. wheat used in feed past 10 per cent.
On July 6, front-month Chicago Board of Trade Soft Red Winter wheat closed at a $1.34-a-bushel premium to CBOT corn, slightly above the past year’s average of $1.33. Over the past two years, wheat has traded, on average, at a premium of $1.54 to corn.
FAR FROM 1996
The last time the spread prompted livestock producers to alter their rations on a large scale was in 1996, Johnson said.
Nearby corn futures prices actually fell below wheat for about three weeks that summer, and as much as 100 million bushels of additional wheat was drawn into the feed pool, equivalent to about 4.8 per cent of the current crop.
On some local cash markets, where livestock producers base their feed decisions, wheat is already a strong alternative due to good results from the early harvest.
In the South, wheat grown and stored in places like Oklahoma, Texas and southern Kansas can be moved to nearby feedlots much more cheaply than corn can be shipped from the Midwest, where the bulk of that crop is harvested.
In the Texas High Plains, cash wheat prices were 94 per cent of the value of corn in late June, MF Global’s Feltes said. But in all other parts of the United States – including the top wheat-producing state, Kansas – wheat was between 110 and 120 per cent of the value of corn.
To be sure, corn-based feed dwarfs wheat-based feed in the United States. So any gains in wheat feeding will be incremental and producers will make the switch cautiously.
USDA in June predicted that 5.35 billion bushels of corn will be used for feed during the 2010-11 crop year compared with just 200 million bushels of wheat. The wheat outlook was up 10 million bushels from the May estimate.