After USDA's March 30 Planting Intentions report, the Kansas City Board of Trade (KCBT) July wheat contract price fell 42 cents and the Chicago Board of Trade July corn contract price fell 47 cents. Wheat harvest contract prices fell 31 cents, and at this writing, have recovered to within eight cents of the March 29 price.
It started with the government program to promote the use of corn in ethanol production. Ethanol use of corn for the 2004/05 and 2005/06 marketing years was met with an 11.8 billion bushel corn crop followed by an 11.1 billion bushel crop. These were the two largest corn crops on record.
By the 2006/07 corn marketing year, ethanol production required about 2.1 billion bushels of corn. In 2006, U.S. farmers produced the third largest corn crop on record, 10.5 billion bushels. This was about 1.2 billion bushels short of use. The result was that the corn stocks were mostly used up and the market had to buy land from other commodities to produce corn in 2007.
No one knew what corn price was required to buy the land out of soybean, cotton, and wheat production. So the market bid the CBT July corn contract up from $2.67 on September 14, 2006 to $4.58 on February 26, 2007, a $1.91 per bushel or a 72% increase.
Market analysts conducted producer surveys in January and February to determine how many acres of corn would be planted. The survey results indicated that the corn price may have been too high bidding too much land into corn production. Corn and wheat prices started downtrends on February 27. Between February 27 and April 2, the CBT July corn contract fell from $4.58 to $3.58.
The KCBT July wheat price peaked on February 26 at $5.27. Between February 27 and April 2, the July wheat contract fell to $4.33.
Market prices tend to over react. The market had to raise corn price to buy land into corn production. Indications are that the market wanted to entice producers to plant about eight million more acres to corn than last year's 78.6 million acres. Given the higher corn prices, producers decided to increase corn acres by nearly 12 million acres to 90.5 million acres.
The market is also making other adjustments. Wheat may be substituted for corn in livestock feed. During the 2007 wheat harvest, corn prices are expected to place a floor on wheat prices. Wheat has about the same feed value as corn.
At harvest, corn and wheat prices may be about the same. After harvest, the wheat prices may be about 30 cents less than corn prices.
At this writing, the CBT July corn contact is $3.80. The corn cash price in Oklahoma and the Texas panhandle is about 55 cents above the CBT July contract price. This implies a wheat harvest price floor at about $4.35. This is $3.80 plus 55 cents transportation and handling.
At this writing the KCBT July wheat contact price is $4.70. Wheat may be forward contracted for 35 less than the KCBT July wheat contract price or for $4.35.
The difference between CBT July corn and KCBT July wheat contract prices support the premise that corn and wheat prices are tied together.
Between now and July, the market will watch and will react to the development in both the wheat and corn markets. Anything that impacts either wheat or corn production will impact both wheat and corn prices.
The reasoning is that feed demand will determine both the price of wheat and corn. Anything that lowers the amount of wheat for feed will result in higher wheat and corn prices. Conversely, anything that happens to increase the amount of wheat for feed will result in lower corn and wheat prices.
The market has provided information about one of four things that must happen in the corn market. Producers are planning to plant 90.5 million acres to corn. Now the producers have to plant the corn, get the weather to grow the corn and finally harvest the corn. What happens to each of these will impact wheat and corn price.
Both wheat and corn stocks are tight. A lot can and will happen between now and the corn harvest, which occurs September and October.