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A powerful bull in corn

RGtimeline/ThinkstockPhotos Corn piles at grain elevator.
Corn and wheat prices are up across the board.

In my January 2021 column for Corn & Soybean Digest, I noted that the corn and soybean price rally in the last five months of 2020 was among the strongest on record since 1980. The Mar’21 corn and soybean contracts rose 43% and 46%, respectively, from early August to the end of the year.

Little did I know that the market was just getting warmed up.

Since the start of the new year and through May 7, the Jul’21 corn and soybean contracts are up another 52% and 22% respectively. Almost the entire price increase occurred in a five-week period, starting in April.

The rally has not been limited to futures prices. In southern Minnesota, the corn basis has turned positive. That may not impress many corn growers in the eastern Corn Belt, but a positive corn basis in northern Iowa or southern Minnesota is not a common occurrence. The last time the corn basis turned positive in my home state was the tail-end of our last drought, in the summer of 2013. The soybean basis has also slipped into positive territory – a stunning contrast to a basis of $1 under in the spring of 2019.

Markets adapt and respond to higher prices and, like any good analyst, I look for signs that a market is adapting and responding. With corn prices so high, the wheat/corn price spread becomes a point of interest.

Despite its role as a major food grain, wheat is also a feed grain. Every year, the world feeds 15-20% of the wheat produced. In the U.S., wheat feeding is usually less than 10% of production, and generally limited to lower protein soft wheats, particularly soft red winter wheat grown in the eastern Corn Belt. It is not rare for lower protein soft wheats to trade at a discount to corn – particularly lower quality wheat with test weight or damage issues. Millers and bakers are picky about the quality of wheat they use to make cookies and crackers. Exporters have quality standards too. Wheat that doesn’t make the grade is fed.

What is rare is hard red winter wheat – bread wheat – trading at a discount to corn. Over the past decade in South Dakota, hard red winter wheat has averaged a $1.30/bu. premium to corn, ranging from brief lows of 10-15 cents in 2012 and 2016, and highs nearing $3/bu. in 2014 (see accompanying chart).

A change is underway in early May. A quick perusal of wheat and corn bids at five different South Dakota markets shows HRW wheat at a 30-60 cent discount to corn.

I understand that the feeding of wheat to cattle is limited – apparently the issue of gluten tolerance is not limited to humans. Hogs, however, can do quite well on a wheat heavy feed ration. Markets adapt. If corn prices maintain high levels, I expect wheat feeding to surge in the year ahead.

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Data source: USDA/NASS QuickStats, South Dakota corn and winter wheat prices received by farmers. Early May estimate based on an average of five South Dakota markets: Aberdeen, Mitchell, Huron, Kadoka and Watertown.

 

Source: Ed Usset which is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. 

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