Commodities Watch: Corn-Wheat Imbalance Continues (DBA, MOO)

For the past couple of weeks the price of corn has risen above the price of wheat, a market condition that has occurred just twice before in the last 27 years. The reversal typically rights itself as lower wheat prices eventually drag down the price of corn. But this time corn may lead the way itself.

Non-commercial traders (speculators) reduced their long positions in corn futures by some 20% last week, leading reductions in long wheat futures positions, which gave up 10% in the Kansas City market for hard red winter wheat. Selling in the Chicago market for soft red winter wheat is also going full blast, with net short positions rising to a seven-month high last week.

The next month could tell the tale. As US farmers gain confidence on the size of their crop, they will begin to sell forwards which in turn will remove a good deal of the risk from the market. Late planting, fewer planted acres, flooding, all will give way to actual market action.

Grain substitution will also increase as ranchers switch from corn to wheat for feed. Chickens, cattle, and hogs aren’t all that fussy.

Then there is the ethanol boost for corn. Because nearly 40% of the US corn crop is used to produce ethanol, that increases demand and puts a price floor under corn prices that does not exist for wheat. Government mandated ethanol quantities and per gallon subsidies for ethanol producers could force a change in the historical differential that wheat has held over corn.

The US Department of Agriculture will release its latest survey on grain inventories and planted acreage on Thursday. If the corn acreage difference is not much different from the 1.5 million acres that the USDA already has said are missing from corn acreage, corn prices could fall. And even though crop yields are typically less the later that crops are planted, that does not always hold true. A late planted corn crop in 2008-2009 delivered the highest per acre yield ever.

While the wet weather in the spring held back planting, it did serve to put a lot of moisture in the ground that will help the corn crop survive through the heat of July and August.

The possible downside is that the estimate of planted corn acres will be higher than the existing 1.5 million acre estimate. Some observers think that could rise by as much as another million acres. If that happens, yield per acre won’t matter as much. And corn prices will likely rise again.

Wheat will have a hard time catching up because Russia will start exporting again in July. Russian practice is to sell at the lowest price in an effort to gain share, and that is what is expected to happen again this year.

The Kansas winter wheat crop is being harvested now and while yields vary the overall quality of the crop is excellent. Yields in Oklahoma and Texas, where drought has been severe, were about as expected.

Whether or not good crops of corn and wheat will translate into lower food prices remains to be seen. Now that many food suppliers have raised prices to accommodate higher grain prices, it’s unlikely that prices will fall back to previous levels. More likely is that prices will fall somewhat.

The PowerShares DB Agriculture Fund (NYSE: DBA) is up about 1.75% today, to $32.35, in a 52-week range of $23.53-$35.58. The Market Vectors Agribusiness ETF (NYSE: MOO) is up about 1.4%, to $52.43, in a 52-week range of $35.62-$57.93.

Paul Ausick