Wheat's Wild Ride: Unraveling Global Supply Changes And What They May Mean For Corn

Even after the strength wheat has shown over the last few weeks, there are still a few non-believers out there when it comes to how the market has traded. I, of course, use the phrase ‘non-believer’ a little tongue in cheek, because while wheat is not a religion, trading it may make you have to find religion…but I digress...

While they may not be wrong, when it comes to the long-term price dynamics in wheat, the potential changes in the world supply outlook remain something to watch, with numerous implications across a whole host of markets. 

When looking at the situation in wheat, it feels as though we may have found a value or a range where the markets should trade while we work to assess the global supply and demand outlook. Ample supplies in the short term and a covered end-user have allowed the recent run in price to slow to a certain extent. Add to it harvest getting underway across parts of the Northern Hemisphere and it is easy to see where another leg higher may be difficult with the extent of natural selling we will likely start to see. 

As mentioned though, it is going to take months to truly assess the situation when it comes to world supply. The range in estimates of Russian production seems to run from 77 mmt from a grain transportation group to the most recent government estimate of 85 mmt. This is around 10 mmt (365 mbu) less than production estimates released earlier this calendar year. 

While the cuts will not be as great, reductions in the Ukrainian production outlook and questions over Black Sea exports have opened the door to strength in the cash markets recently, with Russian prices spiking at the end of May. 

Problems are not only isolated to the Black Sea region, with French wheat conditions sitting at a multi-year low and reports of too much rain falling in Germany and surrounding growing areas. The abundance of left over supplies has created an interesting dynamic in the market though, with reports of cash carry in the nearby period being offered, to convince folks to hold bushels through harvest, before an inverse in the deferred period threatens to roll back gains.

Here in the US, hard red wheat harvest looks like it will be able to get rolling, with average to above average yields expected in the areas that didn’t battle a spring drought. Soft red wheat quality could become an issue, with heavy rains throughout spring and even now as harvest gets started opening the door to higher incidences of disease and other problems. Marketwise we are still the most expensive wheat in the world, but not as outlandishly expensive as we once were—this is helping the US build a relatively stout new crop export book, with the largest volume sold as we start the new marketing year in four years. 

What happens as we work through June and into July will rely heavily on what the world consumer does—which will likely be driven by harvest yield reports and moves in both spreads and basis. 

How corn has reacted to the strength in wheat is what has surprised me the most over the last several weeks. Corn and wheat tend to trade in a certain way with one another because while wheat is used mostly for human consumption, it also plays a very important role in feed rations around the world. Wheat has more protein than corn, giving it 5-10% higher feed value according to Kansas State University researchers. This higher feed value allows for wheat to trade a bit higher than corn and still see active use. 

For the most part, wheat and corn tend to trade with wheat around $1.30 or so higher. As wheat gets more expensive, if there aren’t any discounts for quality, it starts to work its way out of rations, giving corn an opportunity to gain inclusion. This is something that has my attention, as wheat is currently sitting $2.36 higher than corn on the board—historically wide for that spread.

While it is understandable why we would see corn trade in a more depressed fashion as weather worries start to fade, corn also got a double dose of bearish headlines last week that helped managed money sell with confidence. The first being news that Argentina had managed to jump through enough phytosanitary hoops they have been added as an approved corn supplier to China. With the second saying that corn based ethanol will not qualify for tax credits associated with sustainable airline fuel production.

On the topic of Argentina, I am old enough to remember at least three other times where a shift in Argentine policy was going to reshape world trade and have also been around long enough to see none of those pan out. I am not saying Argentina won’t be able to step in and take some business the US, Brazil or Ukraine may have otherwise fought for, but I am saying, they must compete because the US, Brazil and Ukraine all have exportable supplies and a need to see China business. 

When it comes to the sustainable airline fuel headline, I must tell you, it only just confirmed everything folks in that part of the industry have been talking about for the last year. Corn-based ethanol just doesn’t work when it comes to sustainable airline fuel production without massive tax credits, with many other feedstocks presenting a lower carbon intensity score and working better within the science behind the production. It also probably doesn’t hurt to point out that the announcement covered last year, and this year’s tax periods, when SAF production was nearly non-existent. 

While corn may not be used heavily in jet fuel, its use in ethanol remains incredibly strong, with rising exports seen as a positive sign. 

In the end, I am not one to say the market is wrong, even when its moves feel a little counter intuitive. I will say I still feel as though we have a long year ahead of us though, with limited certainty, keeping sharp rises in price possible until we get a better feel for the situation overall. While US production weather remains unthreatening for now, issues in Mexico, reports of lower than expected early yields as harvest starts in Brazil, Spain coming back into the market as an importer after relying heavily on Ukrainian supplies and remaining uncertainty over Argentina’s outlook could all be surprising catalysts for a move in the weeks ahead. 

As always, don’t hesitate to reach out with any questions. Have a great week! 

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