Historical Wheat Versus Corn Spread Prices

Andy Waldock |

Trading the grain markets has always been tricky, especially during the planting and harvesting periods. Historically, this has placed us at the agricultural epicenter for global grain trade. Obviously, tension in Ukraine and the corresponding 15% spike in wheat prices have reminded everyone that even the agricultural markets are now a global game. In this respect, it’s no longer enough to keep an eye on domestic weather patterns to determine the success of our winter crops or anticipate spring wheat seeding. Now, it is imperative to focus on global production issues and World Trade Organization (WTO) agreements, as well.

The commodity price spike of the 2008 drought put sovereign food security on the minds of every country. This fast tracked negotiations through the WTO regarding base storage levels for different crops as well as export prices and export subsidies as the WTO encouraged staple grain production in countries with untapped capacity. This has led to an historic collapse in the price of wheat relative to corn on the global market.

India is home to the two primary causes of the current pricing structure. India has been hard at work creating an agri-business revolution. Their growth has been tremendous in all major agricultural sectors, including wheat production. India’s production has increased by approximately 50% over the last ten years. Their anticipated harvest is expected to exceed 100 million metric tons this year. This would be bigger than Russia, Ukraine and Australia combined.

India’s supply has been accounted for on the global markets. What hasn’t been accounted for are the Indian government’s subsidies provided to Indian wheat exporters of nearly $80 per ton. Wheat is the most perishable of the three main staple crops (corn, beans, wheat). Therefore, it must get to market in a timely manner post-harvest. India’s lack of infrastructure has prevented Indian wheat from reaching the market at competitive prices. Historically, this created gluts in the local Indian markets. Given the current market prices plus the governmental subsidies, Indian wheat producers have been able to undercut the typical global suppliers to the mid-East and Asia.

The result of these effects is that the price differential between corn and wheat is at an all time low, at least on my charts back to 1980.  Reflecting on my experience in the markets, we’re used to seeing wheat prices about double the corn price and bean prices around double the price of wheat. These are very rough guidelines but we are dealing with an historical precedent. Wheat is currently about 1.3 times the price of corn or, a 30% up charge or, premium if you will while beans and wheat remain about normal.

We believe that the spread between corn and wheat has begun to move back towards its more historically normal relationship with corn and will continue to do so as the Indian harvest concludes next month. Furthermore, any upset in Ukraine could dramatically affect wheat exports.  The wheat over corn spread appears to have bottomed around $1.20 near the end of January and is currently around $2.20. At these prices, we expect the spread to widen out towards $4. This is a long-term trade that may be one of the more conservative ways to play the grain market as we near the hyper active planting season here in the U.S. 

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