The following article is from Bloomberg:
By Whitney McFerron
Livestock producers in the U.S. are feeding more wheat to cattle, hogs and poultry after the grain became the cheapest relative to corn in 15 years.
Effingham Equity, a feed and farm-supply company based in Effingham, Illinois, will add wheat in its hog-feed rations for only the second time in at least 26 years, said Mark Tarter, the grains-department manager. The company also used wheat in 2008, the last time corn reached a record, he said.
“We work really closely with producers to help them control their costs,” Tarter said. “Right now, with the inverse between corn and wheat, wheat works pretty good. You can’t substitute one for one, but it can go into a diet pretty easily.”
Corn futures for July delivery reached a record $7.9975 a bushel last week on the Chicago Board of Trade, and closed at a 40.5-cent premium to July wheat on June 9, the most expensive for the month since 1996. Corn as much as doubled in the past year after wet weather delayed U.S. planting and demand increased for ethanol and livestock feed. Wheat prices, up 70 percent in the past year, have pared gains as outlook for U.S. supplies improved.
Wheat is usually more expensive than corn, the primary source of animal feed. Before 1996, July wheat futures last traded at a discount to corn in 1984, exchange data show.
The corn rally means livestock operations face losses because feed prices make up their biggest cost, said Chris Hurt, an agricultural economist at Purdue University. Midwest farmers started harvesting wheat this month, adding to supply. The U.S. Department of Agriculture estimates corn stockpiles will be the tightest since 1996 before the September harvest.
More Wheat Feeding
“We’re not going to be short on wheat this next year, and we’re really short on corn,” Hurt said by telephone from West Lafayette, Indiana. “It’s certainly more than likely that we’ll see a considerable amount of wheat feeding.”
Effingham may replace about 20 percent of the corn used in hog feed rations with wheat, Tarter said. Normally, corn makes up about 50 to 65 percent of hog feed, with soybean meal and other grains supplying the rest.
Springdale, Arkansas-based Tyson Foods Inc., the largest U.S. meat producer, is using “limited amounts” of wheat in some poultry operations, spokesman Gary Mickelson said in an e- mail. At a conference on May 17, before corn prices overtook wheat, Tyson Chief Executive Officer Donnie Smith said the company was unlikely to use wheat, even as “we’re always looking at alternative ingredients.”
Sanderson Farms Inc., the fourth-largest U.S. chicken processor, does not plan to begin feeding wheat at this time, spokesman Mike Cockrell said in an e-mail to Bloomberg News. The company has signed contracts for much of its corn and soybean needs through July, Chief Executive Officer Joe F. Sanderson Jr. said May 24 on a conference call with analysts.
Record Corn
On June 10, corn futures for July delivery touched $7.9975, the highest ever for the contract. Yesterday, the price settled at $7.825, while wheat futures for July delivery closed at $7.76 a bushel.
Corn still will be the primary feed ingredient in the next year, USDA data show. The agency estimates the feed and residual use of corn will drop 2.9 percent in the year beginning Sept. 1 to 5 billion bushels. Wheat-feed usage may surge 29 percent from a year earlier to 220 million bushels, the second-highest amount since 2000, the USDA said.
“Most farmers are used to feeding and processing corn,” Ken Goldman, an analyst for JPMorgan Chase & Co. in New York, said in an e-mail. “Converting is easier said than done.”
Hog farmers may have record production costs in the third quarter as corn and fuel prices climb, Purdue’s Hurt said. Producers who feed only corn and soybean meal may lose money until the first quarter of next year, while losses may become smaller if more wheat is used, he said.
Wheat Prices
Increasing use by livestock producers may help support wheat prices until September, when demand may shift back as the corn harvest begins, Hurt said.
“This is one of those unique three-month periods where we’ll be feeding a bunch of that wheat,” he said. “You’ll probably see July wheat bid up relative to corn.”
Corn stockpiles before the start of the 2011 harvest may drop to 730 million bushels, the lowest level since 1996, and inventories will decline further the following year, the USDA estimated on June 9. The agency raised its estimate for domestic winter-wheat production to 1.45 billion bushels, 1.8 percent more than projected in May.
Lower-Grade Wheat
Most wheat fed to livestock would likely be the soft, red winter variety grown in the eastern Midwest, because it’s lower in quality and located closer to many eastern U.S. hog and poultry farms than prime corn-growing regions like Iowa, Hurt said. Production of the variety may surge to 434 million bushels, up 82 percent from last year, USDA data show.
“You can pull a lot of wheat into the feed channels, and a lot of soft red wheat is going to be coming out in the eastern Midwest,” said Louise Gartner, the owner of brokerage Spectrum Commodities in Beavercreek, Ohio. “It’s a pretty easy fix for very high corn prices, while it is discounted.”
To contact the reporter on this story: Whitney McFerron in Chicago at wmcferron1@bloomberg.net
To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net
Source: Bloomberg
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