Is corn about to regain a premium over wheat?

OK, corn still had a little way to go as of close on Wednesday, when Chicago's March contract finished at $6.94 ¼ a bushel, a gain of 0.8%.

But that was nonetheless, a far better performance than wheat, which fell in Chicago by 0.7% to $7.45 ½ a bushel, reducing its premium to some $0.51 a bushel.

That compares with a premium of nearly $1.50 a bushel two months ago.

'Square-up mode'

Sure, there are some ideas that the switch by US livestock farmers to feeding wheat rather than corn has not been as dramatic as some investors have expected.

More will be known on Friday, when the US Department of Agriculture unveils data on US grains inventories, besides winter wheat seeding and World crop supply and demand estimates, in one of the most important days of the year for grain and oilseed watchers.

But just the prospect of the data itself seems to be making corn more popular, given the history of the USDA's slew of January statistics leading to the grain moving limit up or down in Chicago.

With corn futures already down some $1.50 a bushel from their August record high, that might appear to limit the scope for a further downward move, if Friday's data turn out bearish.

"The corn market continues to be in square-up mode as shorts are taking profits or have decided they do not want to be short the market going into Fridays report after the down move of the last month," Darrell Holaday at Country Futures said.

Benson Quinn Commodities said: "It appears the speculative trade favours carrying some length in the corn market into the report."

'Significant move back up'

As an extra fillip weekly US ethanol production data showed output recovering fully from a Christmas lull, rebounding 19,000 barrels a day last week to 826,000 barrels a day.

"That is a significant move back up," Darrell Holaday at Country Futures said, adding that the data point to the USDA raising its estimate for US corn use in making the biofuel in 2012-13.

"But don't look for USDA to do that on Friday," in its data revisions, he added.

Furthermore, while Conab raised its estimate for Brazil's corn harvest, it was not by much, to 72.2m tonnes, an upgrade of less than 300,000 tonnes on last month.

"Some feared larger gains," as they did in soybeans, for which Conab lifted its Brazil production estimate by some 100,000 tonnes to 82.7m tonnes, Richard Feltes at RJ O'Brien said.

EU vs US wheat

That said, wheat had fundamental reasons for support too, even if Ukraine's winter crop has got off to a good start, boding well for this year's harvest from a major supplier of competitively-priced grain.

Mr Feltes noted "more chatter that the discount of US soft red winter wheat," as traded in Chicago, "to European Union wheat and corn will trigger US wheat sales".

Expectations of shipments to the UK, which suffered a dismal 2012 wheat harvest, have long been in the mix.

There is also talk of China buying the grain from the US, adding to speculation, also heated up by high domestic prices, that supplies in the top wheat-producing country are not as easy as had been thought, and that maybe last year's crop did suffer heavy disease pressures after all.

'Getting competitive'

And interest in US wheat exports might be not such a surprise, given their increased competitiveness following a decline of more than $1.80 a bushel in Chicago from a high two months ago.

"US soft red winter wheat is now a discount to French wheat. US hard red winter wheat is now a slight discount to German wheat," US Commodities said.

"The bottom line is that US grain at the present time is getting competitive."

Moisture, or not?

There were mixed ideas on another factor at the top of wheat investors' minds – the prospect of rains to ease dryness in some key US winter wheat areas.

"Ideas of better moisture in the southern hard red winter wheat area early next week are putting some pressure on wheat," Mr Holaday said.

But RJ O'Brien's Richard Feltes had a different interpretation, seeing rains this week as "covering only the south east quarter of the US Plains".

Furthermore, the Commodity Weather Group revealed pessimism over prospects for winter moisture across the Midwest and Plains, with year with low snowfall into January typically posting below-normal snowfall for the rest of winter.

Rebalancing influence?

Wheat's decisive fall nonetheless may have been down to the fund rebalancing exercise, in which index funds revamp portfolio weights to get them back to levels indicated by the index they track, and meaning the sale of last year's top performers, such as wheat.

But signally Kansas wheat – which is meant to be being bought, having been included in the DJUBS index – did even worse than its Chicago peer, standing down 0.0% at $8.01 ¼ a bushel in late deals.

And another commodity set for heavy buying because of rebalancing – soymeal – also fell, by 0.3% to $409.50 a short ton.

China buying?

Soybean investors suffered some disappointment when talk of Chinese purchases of US crop went without confirmation.

"Talk of additional Chinese soybean business continues," Benson Quinn Commodities said, adding that "perhaps as much as 10-14 cargos of soybeans have been secured over the course of the last couple of days".

Mr Holaday said: "There was anticipation that we would see some additional soybean sales to China announced today. That has not happened."

The USDA actually did, through its daily reporting system, announce the sale of 120,000 tonnes of soybeans to China.

But the sale was for next season, 2013-14, and of "optional origin", meaning the US might not get the order anyway.

Chicago soybeans for March edged 0.1% lower to $13.85 ½ a bushel.

Time to be contrarian?

Among soft commodities, New York arabica coffee recovered somewhat from early losses after the International Coffee Organization cut its estimate for world production in 2012-13, but still ended up closing down 0.2% at 147.90 cents a pound for March delivery.

New York raw sugar for March ended up 0.3% at 18.72 cents a pound for March delivery, if only because of a backlash at the extent of bearish bets on the sweetener.

"There are corners of the trade a little concerned in the short term that the market is overly short both outright and spreads but otherwise it's hard/ impossible to find a medium-to-long0term bull out there,"

"We remain conscious that in the short term there are some heavy shorts in the market, and when virtually everyone you speak to seems to be overtly bearish, it's maybe time to contemplate thinking contrarian," Thomas Kujawa at Sucden Financial said.

New York cotton for March closed down 0.4% at 74.79 cents a pound, despite Australia's drought adding to ideas that prices may gain support ahead.