At The Same Price, Corn & Wheat Are Not Equally Attractive | MartinKronicle - Michael Martin
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At The Same Price, Corn & Wheat Are Not Equally Attractive

may.corn.wheat

There have been a couple of write-ups about corn and wheat being “at parity” since they are at the same price. The articles are speaking about the May (K) contracts for both.

This phenomena is irrelevant. What is compelling about comparing wheat to corn is the protein content. Each has a different % protein composition. The CBOT wheat has about 11% protein and CBOT corn has about 8%. (FYI – the KCBOT wheat has the highest percent protein, but that’s not the one being compared. It’s also a different grade of wheat.)

You might not care about protein content of these commodities, but the feedlotters do. Kansas wheat is used for breads, and CBOT wheat is used for making cookies and crackers. They are different grades of wheat and cannot be delivered against each other. Most wheat is used to make flour, but some of it can be substituted into cattle feed. Corn has several uses, such as ethanol production, corn meal, but mostly it is used for sweetener.

wheat.strip

(click for larger and clearer chart)

Wheat is a carry-charge market right now (see calendar above). That means that each successive month in the calendar has a higher price than the previous. The difference is what’s called “the carry.” What the market is saying in a carry-charge market is that “we will pay you more later in the year if you store your wheat than we will at today’s prices.”

corn.strip

(click for larger and clearer chart)

Corn (above) on the other hand, is a market in backwardation: it is inverted. The prices for the near months are higher than the deferred months. This market penalizes storage. “We will pay you top dollar for your corn right now, and pay you much less if you decide to store you corn.”

At the same price, you’re getting less protein in corn than if you bought wheat. At least for the May (K) contracts. In this regards, corn is not as valuable as wheat, as some suggest.

What will happen to the deferred months if the demand for corn increases or an increase in acreage does not allay the concerns for tight supplies in corn?

Tomorrow I’ll show you how a spread look between wheat and corn. These types of spreads are called inter-commodity spreads because they are two different commodities in the spread.

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