Slumping corn prices on the Chicago Board of Trade are eroding the appeal of wheat as a feed alternative for livestock production, an industry that the government had expected to drive U.S. demand in the next year.
The CHART OF THE DAY shows the discount for Chicago corn futures to wheat on the Kansas City Board of Trade reached $1.215 a bushel on May 25, the widest since Sept. 1. Corn plunged 9 percent last week, the biggest drop in a year, after rain improved Midwest crops. About 72 percent of fields were rated good or excellent as of May 27 by the U.S. Department of Agriculture, compared with 63 percent a year earlier.
“As the price drops, the feeders are going back to corn,” Jason Britt, the president of brokerage Central States Commodities Inc. in Kansas City, Missouri, said by telephone. “On the feeding side, wheat would be out of the equation.”
Livestock producers were forecast to increase U.S. wheat use by 28 percent to 230 million bushels in the year that starts today, helping to fuel a 5 percent increase in total domestic consumption of 1.248 billion bushels, the USDA said on May 10. The government may cut its demand forecasts after corn fell 12 percent this month to $5.57 a bushel and Kansas City wheat gained 0.5 percent to $6.65 a bushel, Britt said.
Economist Dennis Gartman recommends buying wheat contracts in Kansas City and Chicago and selling corn. Wheat may rise relative to corn because of possible damage to crops from dry conditions in Russia, expected by the USDA to be the fourth-biggest exporter in 2012-2013, and Ukraine, he said yesterday in his daily Gartman Letter.