Corn, Wheat Swap Roles as Prices Surge
(WSJ) In a reversal of historic patterns, the price of corn is higher than wheat, an anomaly that is upending commodities-trading strategies and changing what poultry producers feed their chickens.
Tyson Foods Inc. and Pilgrim's Pride Corp., which together process 3.7 billion chickens a year, have begun sprinkling wheat into chicken feed, traditionally a corn-based concoction. Livestock and ethanol producers also are turning to wheat as a supplement to corn.
Wheat usually costs much more than corn, trading at a 31% premium as recently as January. But corn has risen 7% so far this year amid low supplies and rising demand from China. Meanwhile, wheat has tumbled 17% as many countries produce bumper crops.
The change is showing up in corporate profits.
Tyson Foods on Monday reported a 21% year-on-year drop in earnings for the quarter ending July, citing higher feed costs for its chickens.
In response, Tyson now uses small amounts of wheat "when the price is right," said Gary Mickelson, a spokesman for the Springdale, Ark., company. Tyson also is considering whether to use other grains. A spokesman for Pilgrims said the company has been using a small amount of wheat to feed its chickens in selected locations.
Since 1970, wheat has cost an average of $1 per bushel more than corn. The reason: wheat is used mainly to feed people, in flour for bread, pasta and pastries, while corn is more commonly fed to animals.
In April, though, corn prices topped wheat for the first time in more than a decade at the Chicago Board of Trade, in part due to strong demand from China. The gap grew to 66.75 cents in July.
On Monday, corn settled at $6.7525 a bushel, and wheat finished at $6.565 a bushel—a difference of about 19 cents.
Because of the flip-flop, livestock farmers and ethanol plants also are using more wheat. Chinese hog producer Muyuan Breed Co. Ltd. is buying about 200 metric tons of wheat a day now.
For traders, the price move is scuttling a popular strategy in which they bet on the differences between corn and wheat.
This time of year, many traders typically would bet on wheat gaining on corn, since the main wheat harvest is over and more corn supplies are poised to hit the market, said Bob Bresnanhan, chief executive of Trilateral Inc., an agricultural consulting firm.
But many traders have stayed out of the speculation this year because "the seasonal reliability is not there," he said.
The vast majority of ethanol made in the U.S. is distilled from corn, but the fuel also can be made with wheat.
Andersons Inc., a Maumee, Ohio, ethanol producer, recently began using a feedstock containing about 5% wheat at one of its three plants, said Hal Reed, president of the company's grain and ethanol group.
While the quantity of wheat being used is small, it can "help save some money," he said.
Andersons plans to use wheat for two months, added Mr. Reed, who expects wheat to stay cheaper than corn until the fall harvest.
The price fluctuation is unlikely to persuade consumers to switch to corn flakes from Wheaties. Major food makers often hedge their raw-ingredient purchases in advance.
General Mills Inc., maker of Wheaties, and Kellogg Co. declined to comment.
Peter Levangie, president of Bay State Milling Co., a wheat-flour producer, said the Quincy, Mass., company hasn't seen signs that price swings are driving customers to use wheat instead of corn.
That could change if corn prices keep moving higher, as many analysts expect. As a heat wave grips parts of the U.S., analysts expect the U.S. Department of Agriculture to revise down corn yields in an August crop report due on Thursday, which could further fuel corn prices.
Meanwhile, demand remains strong from China, which is ratcheting up its corn use for livestock feed. "The fundamental outlook is still stronger for corn than for wheat," said Kona Haque, an agriculture analyst with Macquarie Capital.
Still, many livestock producers are reluctant to switch back and forth between corn and wheat because animals tend to reduce their feed intake when adjusting to a new diet, said Jay O'Neil, senior agricultural economist at Kansas State University.
Tyson and Pilgrim's Pride said they are only using a very small amount of wheat in their chicken feed. William Roenigk, senior vice president at the National Chicken Council, an industry group, said wheat prices historically needed to show a 10% discount to corn before producers could save money by using wheat.
http://online.wsj.com/
Tyson Foods Inc. and Pilgrim's Pride Corp., which together process 3.7 billion chickens a year, have begun sprinkling wheat into chicken feed, traditionally a corn-based concoction. Livestock and ethanol producers also are turning to wheat as a supplement to corn.
Wheat usually costs much more than corn, trading at a 31% premium as recently as January. But corn has risen 7% so far this year amid low supplies and rising demand from China. Meanwhile, wheat has tumbled 17% as many countries produce bumper crops.
The change is showing up in corporate profits.
Tyson Foods on Monday reported a 21% year-on-year drop in earnings for the quarter ending July, citing higher feed costs for its chickens.
In response, Tyson now uses small amounts of wheat "when the price is right," said Gary Mickelson, a spokesman for the Springdale, Ark., company. Tyson also is considering whether to use other grains. A spokesman for Pilgrims said the company has been using a small amount of wheat to feed its chickens in selected locations.
Since 1970, wheat has cost an average of $1 per bushel more than corn. The reason: wheat is used mainly to feed people, in flour for bread, pasta and pastries, while corn is more commonly fed to animals.
In April, though, corn prices topped wheat for the first time in more than a decade at the Chicago Board of Trade, in part due to strong demand from China. The gap grew to 66.75 cents in July.
On Monday, corn settled at $6.7525 a bushel, and wheat finished at $6.565 a bushel—a difference of about 19 cents.
Because of the flip-flop, livestock farmers and ethanol plants also are using more wheat. Chinese hog producer Muyuan Breed Co. Ltd. is buying about 200 metric tons of wheat a day now.
For traders, the price move is scuttling a popular strategy in which they bet on the differences between corn and wheat.
This time of year, many traders typically would bet on wheat gaining on corn, since the main wheat harvest is over and more corn supplies are poised to hit the market, said Bob Bresnanhan, chief executive of Trilateral Inc., an agricultural consulting firm.
But many traders have stayed out of the speculation this year because "the seasonal reliability is not there," he said.
The vast majority of ethanol made in the U.S. is distilled from corn, but the fuel also can be made with wheat.
Andersons Inc., a Maumee, Ohio, ethanol producer, recently began using a feedstock containing about 5% wheat at one of its three plants, said Hal Reed, president of the company's grain and ethanol group.
While the quantity of wheat being used is small, it can "help save some money," he said.
Andersons plans to use wheat for two months, added Mr. Reed, who expects wheat to stay cheaper than corn until the fall harvest.
The price fluctuation is unlikely to persuade consumers to switch to corn flakes from Wheaties. Major food makers often hedge their raw-ingredient purchases in advance.
General Mills Inc., maker of Wheaties, and Kellogg Co. declined to comment.
Peter Levangie, president of Bay State Milling Co., a wheat-flour producer, said the Quincy, Mass., company hasn't seen signs that price swings are driving customers to use wheat instead of corn.
That could change if corn prices keep moving higher, as many analysts expect. As a heat wave grips parts of the U.S., analysts expect the U.S. Department of Agriculture to revise down corn yields in an August crop report due on Thursday, which could further fuel corn prices.
Meanwhile, demand remains strong from China, which is ratcheting up its corn use for livestock feed. "The fundamental outlook is still stronger for corn than for wheat," said Kona Haque, an agriculture analyst with Macquarie Capital.
Still, many livestock producers are reluctant to switch back and forth between corn and wheat because animals tend to reduce their feed intake when adjusting to a new diet, said Jay O'Neil, senior agricultural economist at Kansas State University.
Tyson and Pilgrim's Pride said they are only using a very small amount of wheat in their chicken feed. William Roenigk, senior vice president at the National Chicken Council, an industry group, said wheat prices historically needed to show a 10% discount to corn before producers could save money by using wheat.
http://online.wsj.com/
Posted by Colvin & Co. at 8/9/2011 10:41 AM 
Categories: Food Security
Tags: corn wheat commodities agriculture
Categories: Food Security
Tags: corn wheat commodities agriculture
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