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Wheat’s divorce from corn profitable

Wheat’s divorce from corn profitable
Wheat and corn prices are in a close relationship. If wheat prices maintain the close relationship with corn, wheat prices and profits may dramatically decline. If corn prices fall as expected, wheat needs to divorce corn.

Wheat and corn prices are in a close relationship. If wheat prices maintain the close relationship with corn, wheat prices and profits may dramatically decline. If corn prices fall as expected, wheat needs to divorce corn.

The Chicago Board of Trade (CBT) corn contract prices imply that corn prices will decline about $0.74 between now and November. Another $0.30 may be lost due to a declining basis. Corn prices could decline $1.20 relative to wheat prices.

Chicago Board of Trade March and July wheat and corn contract prices are about the same ($6.44 wheat vs. $6.42 corn).  The CBT December contract prices show wheat prices $1.29 higher than corn ($6.97 wheat vs. $5.68 corn).

The KCBT March wheat contract price is $0.46 higher than CBT March wheat and March corn. The KCBT July wheat contract price is $0.44 to CBT July wheat and $0.56 at July corn.

The contract price spread for the December contracts are KCBT December wheat is $0.39 higher than CBT December wheat and $1.68 higher than CBT December corn. CBT December wheat is going from about equal to corn in March and July to wheat being $1.29 higher than corn for the December contract.

Current corn prices are relatively high due to record low corn stocks. The 2011/12 corn marketing year ending stocks are projected to be 801 million bushels. The five-year average ending stocks is 1.4 billion bushels.

Corn prices are projected to decline due to projected record 2012 corn production. The USDA has unofficially projected 2012 U.S. corn production to be 14.2 billion bushels compared to the 13.1 billion bushel record set in 2009. In 2011 U.S. corn production was 12.4 billion bushels.

USDA’s 2012/12 corn marketing year ending stocks estimate is 1.6 billion bushels compared to 2011/12 projected ending stocks of 801 million bushels.

Many analysts believe that USDA’s estimates are high, and that USDA will lower the estimates at the annual crop outlook conference. Allendale, Inc. unofficially estimated corn production to be 13.9 billion bushels and 2012/13 corn ending stocks would still end about 1.3 billion bushels.

These corn projections are based on about 94 million corn planted acres and an average yield of about 161 bushels per acre.

Why KCBT and CBT wheat contract prices are higher for the December 2012 contracts than the March/May/July contracts is somewhat of a mystery.  The 2011/12 wheat U.S. and world ending stocks are projected to be above the 5- and 10-year averages. The 2012/13 U.S. and world wheat production is expected to result in increased wheat ending stocks.

Market analysts have estimated 2012 U.S. wheat planted acres to be 57.2 million acres, which is 5.2 percent more than last year. Wheat production is projected to be 2.2 billion bushels.

Wheat ending stocks for 2012/13 are projected to increase to from 801 million bushels to 950 million bushels. With world ending stocks also expected to increase, it is hard to justify increasing wheat prices.

Wheat futures contract price increases may be due to drought conditions in the heart of hard red winter and hard spring wheat production areas. Concern exists about reduced wheat planted acres in Ukraine and freeze damage to wheat in Eastern Europe, Ukraine, and southern Russia. Northern China has drought problems.

World and U.S. wheat planted acres are expected to be higher than last year. World and U.S. wheat stocks are above average. However, the market is still sending the price signals to ensure adequate food wheat is available.

If these concerns are alleviated (by a relatively large 1012/13 world wheat crop), wheat prices could look like corn prices and decline $1.20. To the dismay of wheat producers, this could save the wheat/corn marriage, and corn prices would support wheat prices at a lower level.

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