Analysis: Wheat defies seasonal norms with rebound on corn price rally

Singapore — Global wheat prices are drawing strength from soaring corn prices, which have hit a record high as strong demand and supply concerns stemming from weather woes apply pressure to both sides of an already tight balance sheet, narrowing the feed wheat to corn price ratio to an unprecedented low.

S&P Global Platts Black Sea 12.5% protein wheat and Australian Premium White wheat assessments plunged by $48.75/mt and $33/mt respectively between Feb. 25 and April 8. This was in line with seasonal norms, factoring in a steep inverse ahead of the Black Sea new crop, which is slated to be available for shipment from July.

However, that seasonal correction proved unusually short-lived, with both indices rebounding strongly from April 8, gaining back 60% and 100% of what they had lost since Feb. 25.

Meanwhile, the CFR Northeast Asian corn index hit its highest level at $325/mt April 27 since Platts launched the assessment in August 2016, skyrocketing 88% in a rally that began on May 8, 2020.

That sustained rise in corn prices has been the primary factor lifting wheat prices as the market tries to maintain the usual feed wheat-corn price ratio. Feed wheat is generally priced at a premium to corn due to its relatively superior nutritional value.

The spread between Australian Standard White wheat, a feed quality grade, and corn narrowed to its lowest point April 1 at minus $46/mt since Platts started assessing ASW on Oct 1, 2019.

At that level, the ratio had narrowed 126%, or by $133.50/mt, since the corn price surge began in May 2020.

China demand a key driver

The prevailing tight global corn balance sheet means the slightest change in demand or supply is resulting in large price swings.

China is they key driver of the demand narrative, as the country's grains demand remains resilient amid continued stockpiling and the healthy requirements of its rapidly recovering hog sector.

Market talk suggests that China has booked up to 3 million mt of new crop US corn in recent weeks. While this could not be confirmed, the talk has been a major factor in triggering the latest price spike, market sources said.

Chinese feed buyers were also heard to be incorporating more wheat into their feed mix due to persistently high corn prices and recommendations from the government to reduce reliance on corn and soymeal by diversifying into alternative feeds.

Alongside demand for imported corn to compensate for the domestic deficit, China also has substantial demand for imported wheat, highlighted by their continuing purchases of wheat from Australia despite escalating trade tensions between the two countries.

Between the start of the current marketing year in October 2020 and February, Australia had shipped almost 1 million mt of wheat into China, according to Australian customs data. This compares with just 321,769 mt during the same period of the previous marketing year.

Moreover, market participants say China has continued buying in subsequent months, with talk indicating that China has emerged in recent weeks to purchase August shipments from Australia.

"I know Graincorp sold an August [shipment] because we saw the freight," a trader said. Other traders said anywhere between four and six shipments may have been sold.

South Korea has also replaced a portion of its corn demand with feed wheat, purchasing 825,000 mt of feed wheat to date in 2021, more than doubling from 395,000 mt in the same period last year, Platts reported earlier.

Indonesia is also seeing strong demand for wheat from the feed sector as the country faces high domestic corn prices following a poor crop.

"Demand for cracked wheat through the flour mills is in high demand. It's technically not permitted, as there is no feed wheat import permit as such, but I think the government turns a blind eye to it so long as it's processed by the flour mill," a trader said.

On the supply side, weather woes in the US and Brazil remain focal point. Brazil's safrinha or second corn crop faces potential adverse effects from extreme dryness, while planting has slowed in the US Midwest due to cold and dry weather.

Price volatility set to continue

Market opinion on the price direction and timing of price movements was mixed, with the common view that price volatility was likely to continue for the short to medium term.

The unprecedented price rebound has caught Asian wheat buyers off guard, and many had been slow to cover pent-up demand during the short-lived price dip.

Adding salt to the wound was the general market expectation that wheat prices will continue to find support from elevated corn prices. "All factors at play currently suggest the sky is the limit," a trader in Singapore said.

However some pointed to the record long position in Chicago Board of Trade or CBOT corn futures as a factor that may help prices ease at some point in the near future. "The funds will have to take out their money eventually," the same trader noted.

In the meantime, the risk of African swine flu outbreaks cannot be ruled out, with many holding the view that China may be underreporting its cases. Any outbreak could potentially slash the country's grain-buying spree.