Posted on September, 24, 2024 at 08:43 am
Corn and soybean growers yearning for higher prices may have to look at another market for signs of a turnaround: Wheat could be the bell cow for those hopes as grains head into the end of the year.
For starters, wheat-corn spreads typically turn lower as corn gains ground in the fall. Weather could also produce a beneficial counter-seasonal trend if seeding conditions in major growing regions swell wheat’s premium. Normally corn gains when supply and demand shifts take hold, so a rising tide from wheat could spread over to lift all boats.
Those wheat-fueled gains in corn are relatively rare, but when they happen, hold on for the ride. Two of the biggest rallies in history came on the heels of exploding wheat markets. Even if wheat can’t provide quite the same help this time around, it could improve the odds for corn and soybeans.
Dry fields from the U.S. to Europe and South America are the worry this year, as farmers dig into fall harvest and prepare ground for seeding. La Nina cooling of the equatorial Pacific only adds to this uncertainty
Wheat, in this case the contract for the soft red winter classes settled in Chicago, tends to gain in value against corn from June until October. Think about it: wheat fields are cut in summer, boosting supplies when inventories of corn and soybeans are running thin. Prices normally reflect those dynamics but trade places come October, when wheat stocks are emptied and bins in corn and soybean country fill up.
Chicago December wheat closed $1.81½ ahead of December corn after release of USDA’s Sept. 12 World Agricultural Supply and Demand Estimates. That’s around 30% above the spread average over the past 20 years.
Before 2007 the wheat-corn premium normally didn’t exceed $2, but those limits changed following the financial crisis, pandemic and Russia’s invasion of Ukraine. The spread topped out at an all-time high of $7.55 near the end of February 2008 when SRW hit a record it didn’t exceed until 2022. The big ask for wheat now is whether it will regress toward the mean or take on a life of its own.
Big moves in wheat can be few and far between:
It’s grown around the world, for one, and traded in different currencies on multiple exchanges where variances are quickly arbitraged.
Cash prices can vary widely from futures because some markets favor specific classes while others don’t.
Protein premiums can add another factor to the mix.
But when wheat starts to rock it can really roll. The nearby jumped 85% in Chicago after Russia’s “annexation” of the Crimea.
The Black Sea region is in the news again, thanks to an extremely dry fall, though most areas do not face severe conditions. Fields in South America are in similar shape and 58% of U.S. winter wheat is in drought, compared to 32% on average.