Wednesday, June 26, 2019

Substitution Effects In The Ag Markets: Cows Feasting On Wheat

As noted in the intro to last week's Smart Talk On Grain Futures: "The Other Side of the 2019 Corn Rally":
The corn and soybean markets, because of substitution effects from the producer level on down, are very intertwined despite being very different and having very different end-uses....
And the outro:
...Just to make things interesting, in Kansas farmers can shift between corn and wheat and in fact last year acreage devoted to wheat declined to 100 - year lows while corn production ranks #6 in the country.

Wheat 7.7 million acres
Corn   5.3 million acres 
Producers can substitute what they raise, end users can substitute what they use.
And today's story from Bloomberg, June 25:
Surging corn prices put us wheat back in the feed trough
A looming shortfall in U.S. corn production after a historical spat of wet weather means wheat is back on the menu at cattle feedlots in the southern Plains.

Surging prices for corn, the gold standard in fattening cattle, are making wheat that's usually reserved for human food into a relative bargain for feeding livestock. Prices for both crops surged after record rainfall this spring saturated American fields. But corn's gains have outpaced those of wheat, shrinking the latter's traditional premium. In some parts of the U.S., the cash spread has even swung to a discount.

Hard red winter wheat, typically used to make flour for bread, was being sold as feed to cattle and hog operations for shipment in July, August and September, said Justin Gilpin, chief executive officer of the Kansas Wheat Commission, a trade group.

"In southwestern Kansas, we've seen more wheat put on the books for feed than in quite a while, Gilpin said in a telephone interview. "That's in large part because feeders are concerned about corn prices and availability.

The U.S. Department of Agriculture earlier this month surprised traders by projecting smaller-than-expected wheat stockpiles, partly amid expectations for more use in livestock feed. The agency will issues figures on quarterly grain inventories in a report due Friday.

The USDA estimated about 140 million bushels of wheat will go to domestic feed and residual use in the season that started June 1. While that's nearly triple last season's amount, it still represents only about 4% of total supply, leaving room for more demand gains that could further erode reserves.
Also adding to the mix is expectation of lower wheat quality this year, which may leave more of the crop for feed instead of human consumption. Harvesting in key U.S. states is running behind and the average protein content in hard red winter grain is lower than last year, according to U.S. Wheat Associates.

Cattle ranchers in western Texas look at the grain as a feed option when wheat futures' premium to corn gets close to about 60 cents per bushel, according to Charlie Sauerwein, a consultant at grain merchant WindRiver Grain LLC in Garden City, Kansas....MORE