Wheat not yet cost-effective corn alternative

Cattle Market & Farm Reports, Editorials
Jun 27, 2008
by DTN

Wheat not yet cost-effective corn alternative

Amid fears that flood-induced acreage losses will push corn prices even higher, livestock producers are considering their options to find the least-cost feed rations for their herds.

For now, wheat prices are too high to be considered a cost-effective alternative for corn, but that could change as flood damage is assessed and corn acreages losses calculated.

"How this all turns out in the end will depend on what happens with the corn crop and the price of corn," said Gary Vocke, ag economist for USDA’s Economic Research Service.

"We don’t know the result of all this flooding, what will be the consequences," he said. "Only after the water goes down will we be able to get a clear understanding of what happened."

USDA has increased the feed and residual wheat use from only 60 million bushels last year to 255 million bushels this year, but Vocke attributed last year’s small number to high export demand and high prices.

"Wheat was priced above the price of corn, so unless wheat was very, very damaged, producers would not feed it," he said. "This year, we expect our exports to be down and we have larger supplies, so we expect there will be some feeding."

Still, cost will be the determining factor in any livestock ration.

The hard red winter wheat grown on the Plains is still priced too high to work its way into livestock rations; however, a huge crop of soft red winter(SRW) wheat grown in the South and Southeast has pressured prices in those states and may be working its way into feed rations for pigs and poultry, Vocke said.

Bill Dicke, a nutritionist for the feedlot consulting service Cattlemen’s Nutrition Services LLC, said he has heard some discussion of changing portions of cattle rations from corn to wheat, though he has not yet seen any changes.

"It’s all price-related, and wheat isn’t necessarily that low in price," he said. "When producers can purchase wheat for the same price or below the price of corn, then it will go into rations, especially if greater supplies after harvest lead to lower prices."

He noted that wheat does have several advantages over corn. First, it’s less costly to process than corn, and second, wheat starch is more digestible than the starch in corn, a characteristic that makes wheat a good fit in a ration with dried distillers grain, which has most of the starch removed during the ethanol-making process. However, there hasn't been a lot of research or work done in that area, he said.

One concern producers may have about wheat is that they need to have several months’ supply.

"If producers are going to feed wheat, they need to be able to know they can feed it for several months," he said. "You don’t want to jump in and out with wheat if you are feeding higher levels; you need to be more careful to adapt cattle to wheat than other ingredients."

Galen Erickson, associate professor and beef feedlot Extension specialist at the University of Nebraska-Lincoln, said that wheat is digested rapidly and works fairly well as part of beef finishing rations. But because of the rapid starch digestion, producers may face some risks if wheat constitutes more than 35 to 50 percent of the diet on a dry-matter basis.

Erickson said he expects that higher corn prices will likely lead to an increase in the price of all other alternatives, such as wheat, barley and grain sorghum.

"All of these grains are interchangeable, at a price. Therefore, when one is priced competitively, as a general rule the usage increases, which leads to an increase in price," he said.

So just what can livestock expect in regards to wheat prices and markets?

DTN Analyst Elaine Kub said the SRW trade has really devolved into two completely different markets: the bullish futures market and the bearish cash market. Kub said it would be unlikely for wheat prices to fall below corn future prices, even assuming the most bullish supply-and-demand picture for corn and the most bearish supply-and-demand situation for SRW.

"That’s because there are speculative traders who will always expect—and act to maintain—a premium for wheat prices over corn," Kub said. "We are seeing that now as Chicago wheat futures trade over $9 a bushel, even during a bearish harvest season, while corn futures are at $7.40."

To get a real feel for corn and SRW demand from consumers, one has to look at the cash markets where the difference in prices is historically low. That is more in line with the real supply and demand of those markets, Kub said. To some degree, wheat should always have a fundamental premium over corn, simply because it provides slightly different nutrients, but as wheat's abundance becomes more widely known in the northern half of the Corn Belt, those cash prices will be expected to continue to drop.

"I would not be surprised if cash corn bids overtake cash SRW bids, especially in localized regions where SRW production is widespread and the corn is getting shipped west to delivery points or ethanol plants," Kub said. "However, we may have a month or more before the average SRW bids soften to something under $7 per bushel. Already, we can see the weakest basis levels—$2.50 or as much as $3.41 under the July futures contract—in the regions where harvest has gotten under way." — DTN

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