From the June 01, 2011 issue of Futures Magazine • Subscribe!

Exploiting wheat’s weak sister status

Market Strategy

A falling dollar, food inflation and biofuel production have pushed corn and soybean prices higher and are expected to continue through the growing season. While the supply/demand balance may continue to favor bulls in those markets, wheat is a different story as supplies are more ample in 2011 than those of corn or soybeans.

Unlike corn and soybeans, whose exportable supplies are grown primarily in North and South America, wheat is a global commodity grown throughout the world. While weather issues in some of the larger producers spiked wheat prices last year, production is getting back on track in 2011.

In addition to supply, wheat is not fully sharing in the demand boom experienced by corn and soybeans. BRIC nations (Brazil, Russia, India and China) are experiencing explosive growth of a new middle class that rapidly is adding meat to its diet. Corn and soybean meal are a main component of many animal feeds. In addition, corn also now feeds a demand sector from the ethanol industry. The USDA estimates that more than 40% of the 2010/11 U.S. corn harvest will be turned into ethanol.

Wheat is not used for biofuel production. And it comes in a distant third as an animal feed. While wheat prices still benefit from growing populations and potential inflation it has not matched corn and soybeans in adding new avenues of demand.

In grains, there is no greater fundamental than the stocks-to-usage ratio — a figure that measures the amount of stocks available at the end of the crop year vs. the projected demand for the upcoming year. While the 2010/11 U.S. stocks-to-usage ratio for corn approaches the second lowest on record at 5% for 2011 and soybeans stocks-to-usage tumble to a paltry 4.2%, wheat stocks-to-usage remain at a hefty 34.2% for the year (see "Well stocked"). This is a primary reason why wheat has not tracked corn and soybeans. And, despite production setbacks in Canada, Russia and Australia last year, projected global ending stocks-to-usage in wheat is a healthy 27.6% in 2011.

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