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US wheat imports may rise to fill corn supply gap

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Wheat imported from Australia and Europe - rather than home-grown grain - may fill a hole in American corn supplies, a leading analyst said on Monday, as investors continued to puzzle over controversial US crop data.

The US Department of Agriculture on Friday stunned markets by keeping its estimate for domestic corn supplies at the close of 2010-11 unchanged at 675m bushels, despite stocks at the half-way point falling 170m bushels short of expectations.

The estimate - which implies domestic corn use slumping from a record 7.2bn bushels in the first six months of 2010-11 to 4.4bn bushels in the second half – reflected a forecast that livestock farmers will, in the face of record corn prices, switch to US soft red winter wheat in feed rations.

However, Macquarie analyst Alex Bos, while acknowledging there may be some US substitution of corn ahead, raised doubts over the level to which it was US wheat which would fill the hole.

'Opportunity to import'

"I am sceptical that feed use of soft red winter wheat will be much higher than in any normal year," Mr Bos told

"This might be an opportunity to import feed wheat, even possibly from Europe and Australia," besides Canada.

"Every year a little bit of wheat lands in the US south east. It should be higher this year than normal because of the problem in the US feed balance sheet."

America's wheat imports have grown over the last 30 years, hitting a record 3.5m tonnes two seasons ago, as many farmers have opted to sow other crops instead, although the country remains very much a net exporter of the grain.

Carry factor

Mr Bos's assertion was based on the incentive that futures prices are giving to producers and merchants to hold on to soft red winter wheat, the type traded in Chicago.

Wheat for December was trading above $8.90 a bushel on Monday, nearly $1 a bushel more expensive than for delivery next month. Wheat for delivery early next year was worth well over $9 a bushel.

This level of so-called "carry" - reflecting in part a sliding scale of storage rates introduced last year to marry futures prices at expiry closer to cash levels – was incentivising holders of soft red winter wheat "to sit out rather than sell [wheat] into the market as feed".

Separately, Rabobank analysts said: "It is unlikely that much of the [soft red winter] wheat will go into feed channels as elevators are reluctant to sell, given the strong variable storage rates."

Parity ahead?

Rabobank added that is still expected corn prices to outperform after the report, and potentially reach parity with wheat in Chicago for the first time since 1996.

Kansas-traded hard red winter wheat would, thanks to the poor condition of the US crop, continue to enjoy, and may increase, its premium over its Chicago peer, an advantage which has reached a record $1.50 a bushel.

However, Goldman Sachs said that the potential for increased demand of soft red winter wheat "will likely weigh on the Kansas versus Chicago price differential".


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