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How much wheat will be fed?
In today's monthly supply-demand report, USDA estimated this year's wheat feeding at 220 million bushels, unchanged from last month but up a hefty 35% from last year. However, veteran Chicago grain analyst Rich Feltes thinks actual feeding, when the wheat year ends next May, could be closer to 250 million bushels.
"In this year of high corn prices and tight supplies, the story on wheat feeding is still unfolding," says Feltes, research director for R.J. O'Brien.
Normally, the wheat feeding story is pretty well finished by the time combines march through the corn fields. Most wheat feeding occurs during the summer, when new-crop wheat supplies are highest (and possibly cheapest) and old-crop corn supplies are tightest ahead of harvest.
But this year, corn prices could be firm all year, keeping wheat as a year-round alternative for feeding. "We're in an extended period of unprofitable feeding margins with corn, so at the first hint of a price advantage for wheat, I expect to see livestock feeders switch to wheat," says Feltes.
Grain prices, whether wheat or corn, are historically high. But corn prices have risen faster, confounding livestock feeders who are trying to hold their heads above water. On a full-year average basis for all classes of wheat, USDA projects cash wheat to run about 12% higher this year than last year and about 66% more expensive than 2009-10.
Still, on a relative basis, corn is undergoing a sharper price rise, which may favor some wheat in livestock rations. For cash corn, USDA projects average nationwide prices to run nearly 27% higher this year than last year (September-through-August). And compared to 2009-10, cash corn prices look nearly 125% higher.
Normally, hard red wheat is too valuable to feed to livestock, but a few weeks ago, Feltes heard reports of hard wheat moving from the Plains to southern feedlots. He even heard reports of Canadian wheat moving as far as Texas. (And when Canadian wheat is fed within the U.S., USDA reports it as U.S. wheat feeding, because once it's imported it counts as part of total U.S. wheat supply.)
In the Southeast, the wheat harvest comes early, providing a fresh supply of feed before the corn harvest. And North Carolina had a bumper wheat crop this year, and plans to seed an extra 150,000 acres this fall, says Dan Weathington of the North Carolina Grain Commission. "We can feed all the wheat we grow," he says. The Southeast can also ship foreign wheat into local ports like Wilmington, N.C., at favorable prices after a sharp drop in ocean freight rates over the past two-three years, he notes. In contrast, rates for railing wheat into the Southeast from the eastern Corn Belt have skyrocketed during that same period.
Meanwhile, Feltes cites reports that China is importing feed wheat as a substitute for soymeal. Wheat doesn't have near the 40-50 percent protein level as soymeal. But at 10% to 15% percent protein, wheat has more than corn. As a result of this feed demand, USDA has raised its September estimate of 2012-13 world wheat feeding by 64.6 million bushels over July, and 20 million bushels of that increase is expected in the U.S.
But USDA estimates are subject to change, and some analysts, such as Kansas State University's Dan O'Brien, think USDA will eventually revise U.S. wheat feeding down. With livestock herds shrinking, and livestock operations reluctant to tinker with grain logistics and feed formulas, he thinks actual U.S. wheat feeding when the marketing year ends next May 31 will be lower than 200 million bushels − perhaps as low as last year's 163 million.
O'Brien and other analysts note that high corn prices − especially when there's a sharp quick rise − tend to trigger active talk of an increase in wheat feeding. But such feeding seems to fall short of the hype. There was hype about wheat feeding in the summer of 2011, but in the end, feeding fell short of expectations. In fact, as late as June 12, USDA expected 2011-12 U.S. wheat feeding to reach 180 million bushels. But after the dust settled, USDA revised actual June-May feeding down to 163 million bushels.
And while USDA didn't change its 2012-13 U.S. wheat-feeding estimate today from August, it did subtract 150 million bushels from U.S. corn feeding for the year that ended Aug. 31. It suggests that summer corn-feeding might have been smaller than expected, but USDA didn't compensate by raising wheat feeding.
In contrast, one factor arguing for less 2012-13 wheat feeding is USDA's increase today in U.S. 2012-13 corn feeding, by 75 million bushels over August.
USDA issues these feeding estimates monthly, but for non-USDA analysts, the best measure may be the quarterly stocks report, which shows actual grain in storage. Because the amount of wheat produced, exported and milled is accurately known, the level of actual feeding can be inferred through the quarterly inventories. The next quarterly report will be Sept. 28 (for Sept. 1 stocks), and Feltes and O'Brien may revise their estimates then. That Sept. 28 stocks report might pave the way for USDA to revise its summer corn and wheat feeding, all based on actually Sept. 1 stocks on hand.
Meanwhile, in O'Brien's view, there's price working against wheat feeding. While wheat prices may be close to corn's − instead of their usual steep premium − wheat prices are still high. Feeding profits remain slim, no matter which feed is used. As recently as 2009-10, O'Brien notes, USDA's average cash wheat price was 37% higher than corn's, discouraging wheat feeding. But currently, wheat prices are about only 12-13% higher than corn, which makes wheat look better. However, O'Brien estimates that 12-13% is roughly a neutral range that makes corn look just as good as wheat. A wheat premium above 14%-15% seems to encourage corn feeding while a wheat premium under 10%-11% seems to favor wheat.
O'Brien also argues that wheat has its own non-feed demand driving the market, pushing livestock to the back burner. With some world wheat production dropping off this year, particularly in the Black Sea region, there's good foreign demand for U.S. wheat. USDA expects U.S. 2012-13 wheat exports to rise 14.3% over last year. Hard red winter wheat exports are projected to expand by 44.8 percent. And soft red winter wheat − the kind that's fed most in the U.S. − is projected to see exports rise by 15.2 percent.
Thus, even with a 13.5% bigger total wheat crop in the U.S. this year, ending stocks are expected to drop 6.1 percent by May, keeping support under prices.
"Based on the outlook for a strong wheat market and a good export year, I would be hesitant to dial in a large amount of feeding," he says.
O'Brien remembers a cattleman who tried feeding wheat and will never do it again. By the time his feedlot had set up its wheat suppliers, changed its ration formula and made other adjustments, prices had switched around and corn was the better choice.
When wheat is fed, it's generally soft wheat. Soft red winter wheat made up about 19.2% of the 2012 wheat harvest, but will comprise about 64% of all U.S. wheat feeding, says USDA. Nearly a third of all SRW produced in the U.S. is fed. White wheat made up 12% of the last wheat harvest, but is expected to comprise 13.6% of U.S. wheat feeding.
Finally, when corn prices are high, U.S. livestock feeders are not forced to turn to wheat. They can turn to foreign corn. For 2012-13, USDA has tripled its estimate of U.S. corn imports, compared with 2011-12. The bulk is trucked or railed from Canada, or floated into Eastern and Gulf ports from South America.