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Wheat needs to get used to playing second fiddle to corn

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Corn is making a better fist of keeping its premium over wheat in Chicago this time round. That looks a taster of their relationship for a while to come.

Sure, wheat made an effort on Friday to close its, unusual, discount over the rival grain, regaining some 10 cents per bushel of ground, July contract to July contract.

And its defence of its premium for further-ahead contracts looks pretty solid given the rewards for holding on to grain which were introduced last year by Chicago to close the gap between cash and futures prices.

But wheat had better get used to being overlooked for its apparently greater intrinsic value than corn, being considered, for instance, as a rule of thumb 15% better as a feed source.

Feed dynamics

Time is one factor on corn's side. The beginning of the winter wheat harvest in southern US states - and a better-than-expected start too – as well as in southern Europe will bring fresh supplies to the market, a depressant to prices, besides removing the need to price weather risks into harvested crop.

For corn, which in some US states is being harvested right up to Christmas, this cycle is later.

But demand is in the grain's favour too. Of course, corn's price should underperform wheat's if the grains' relative feed values were all that mattered.

They aren't. Domestic feed use of corn, while now expected by US officials to rise only by 10m bushels in 2010-11, is looking pretty resilient given that production of all major protein types has been cut back, compared with pre-recession levels. Many farmers are reluctant to give up on tried and tested corn-based feed formulas.

And recovery in cattle and hog prices from late-May lows will ease pressure for fresh herd reductions.

Ethanol hunger

Nor does it look safe to bet to assume exports will take all the rap.

The prospects of Chinese corn imports only appear enhanced now its inventories as of the close of 2010-11 have been pegged by the US Department of Agriculture at 53.7m tonnes – 5m tonnes less than previously thought.

And as for corn's use in making biofuels, it looks like requiring a significant drop in the oil market to throw bioethanol plants off course.

US ethanol production hit its highest since January at the start of the month, even with oil prices well below April highs.

Supply comparison

It is hard to argue with the USDA's assessment of both US and world corn stocks ending 2011-12 at historically tight levels.

That warrants quite some premium over normal prices. Certainly more than for wheat, for which supplies are distinctly more ample, and may prove even moreso if the benign early conditions for southern hemisphere producers follow through.

When corn rose above wheat in April, for the first time since 1996, the premium only lasted two days. This spell has already lasted twice as long.

Wheat may have to get used to more frequent, and lengthier, spells in second place.

By Mike Verdin

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