By Augusto Semmelroth | Source: CME
The corn harvest in the US continues to place strong headwinds on CME Dec-13 prices. In the meanwhile, CME Dec-13 Wheat hit a 3-month high. This saw the wheat to corn spread rally to 252¢/bu (A$85/t), a 3-year high. Once the US harvest winds down, what should we expect the spread to do?
Over the last 10 years, the spread between wheat and corn has varied between A$20/t and A$100/t for most of the time. However, this trend has changed substantially in the last two years. Tighter corn stocks, coupled with robust demand for the grain (ethanol production), has seen the usual discounts to wheat disappear.
Another way of looking at price interactions between wheat and corn is to calculate the % premium/discount pattern between them. Similarly to the spread, it measures if one market is under or overvalued in relation to the other, but with better accuracy. This is because the relationship is defined in relative rather than absolute terms. Figure 3 shows a clear range of 20% to 70% premium to corn in the last 10 years.
After trading within a historic low range of 0 to 20% in 2011 and 2012, premiums returned to a more normal level in the first half of the year (figure 3). However, as the prospects for a bumper corn crop in the US started to consolidate, corn prices plunged while wheat saw a more moderated downside. As a result, the spread between CME Wheat and Corn Dec-13 has jumped from A$40 to A$85/t in the last three months (figure 2). In percentage terms, wheat’s premium over corn has moved from 30% to 57%.
While an impressive and rapid turn of events, this seems to be a recurring theme during the US corn harvest. Looking at figure 3, one can clearly see that wheat premiums tend to rally towards the upper 70% boundary in most years. What is also noticeable is the fact that once the US harvest winds down, those premiums tend to plunge.
Wheat premiums disappear rather quickly as a result of a combination of rising corn prices post US harvest and falling wheat prices with the commencement of the wheat harvest in the southern hemisphere.
As a general rule, wheat trades at a premium to corn given its superior nutritional value and more versatile use by different industries, but that’s not always the case as seen in 2011 and 2012.
This year we seem to be returning to a normal seasonal trend which sees wheat premiums to corn rallying during the US corn harvest and then plunging later in the year during our wheat harvest.
The main purpose of this article is not to suggest there are opportunities to trade this spread. The key point here is to demonstrate that harvest pressure has a great impact on the relationship between corn (feed) and wheat prices. It also suggests that now is a good time for growers to sell wheat (before harvest pressure takes place) and a good time for consumers to buy corn or other feed grains. That’s not only true for the 2013/14 crop but also for the 2014/15 crop.
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