Huge Corn, Soy Harvests Will Test Grain Supply Chain

By Casey Chumrau, US Wheat Market Analyst

As the trading day came to a close on Sept. 16, all three nearby U.S. wheat futures contracts hit four year lows. Seasonal harvest pressure is partly to blame but record world supplies have pushed futures lower since May. In addition to ample world wheat supplies, USDA projects global corn and soybean production will each set records for the second consecutive year. These three commodities are interrelated and together will heavily influence wheat cash, futures and FOB prices in the next few months.

While most wheat moves into the human food value chain, the bulk of the world’s corn and soy supply moves into animal feed production. With quality concerns in some of the major wheat-producing countries this year, supplies of feed grade wheat will likely be up. While UDSA expects feed wheat use to be 6 percent greater than the five-year average at 138 million metric tons (MMT), the feed market will not be able to absorb all the extra wheat due to the bumper corn and soybeans crops. Without an immediate home, the global feed wheat supplies will continue to weigh on wheat futures markets.

In addition to influencing futures values, corn and soybeans are also influencing U.S. wheat basis levels in a number of ways. Although the 2014 U.S. wheat harvest is nearly complete, grain markets are just now preparing for the expected record U.S. corn and soybean crops. Wheat basis for October, November and December delivery is higher than September as the market anticipates the increased competition for capacity.

The record corn and soybean harvests will put additional pressure on a rail transportation system that has not yet caught up from last winter when weather issues and competition for rail capacity resulted in delays. In addition, grain elevators at the ports will be working at full capacity, pushing rates higher. Wheat merchandisers have had to compensate for higher rail and elevation costs by increasing basis.

Capacity is always an issue at the beginning of the corn and soybean harvest but these crops will exaggerate concerns this year. The U.S. grain supply system remains the most efficient in the world. Yet, it is important for world wheat buyers to keep a close watch on the inter-commodity dynamics in order to make informed purchasing decisions — with competent help from their local USW representatives.