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Mecardo Analysis - A look at the wheat-corn ratio.

  • By: "Prime" Ag News
  • Jul 17, 2018

By Andrew Whitelaw.

Grain as a commodity is a replaceable product. This is especially true when it comes to feeding animals, when one commodity becomes too expensive – it will be replaced with another. Wheat and corn can both be used as a substitute. In this article we look at corn and wheat to determine the value of feeding wheat.

The wheat and corn markets follow one another very closely. The two markets between 2000 to present have a correlation of 0.86, with 1 being a perfect correlation and 0 being no correlation. The spot futures price for both wheat and corn is shown in Figure 1. Wheat contracts typically trade above corn, due to the greater nutritional value of wheat over corn.

This analysis is largely focused on the impact of wheat versus corn feeding in the US. Nonetheless this is a big enough driver to move wheat futures prices, which in turn will impact on overall returns.

The ratio between wheat and corn is an important indicator of the value of feeding wheat over corn. As the ratio for wheat to corn drops closer to 1:1, a higher percentage of wheat will be fed. As the ratio increases the nutritional benefit of wheat is outweighed by the higher price.

2018-07-17 Grain Fig 1

The wheat-corn ratio has crept above the average since the turn of the century (Figure 2), currently trading at 1.45. Although the ratio has been much higher in the past, it is currently at the highest level since mid-2015.

2018-07-17 Grain Fig 2

It is also important to examine the seasonality of the ratio. There is a tendency for the ratio to increase in the Aug-Oct period (Figure 3). This is logical as it occurs during the harvesting period for US corn, while growers selling pushes the price down.

2018-07-17 Grain Fig 3

We can see that for the past two months the wheat ratio has been tracking above the average and well above levels seen during the past two years of ample stocks.

 Key points

   * Wheat and corn follow one another with a high degree of correlation (0.86).

   * As the wheat-corn ratio increases the % of wheat used for feeding purposes will decline.

   * The wheat-corn ratio is currently at the highest level since mid-2015.

What does this mean?

If the trend of an increasing ratio continues wheat will be unattractive for US feeders to utilize. This will result in a reduction in US wheat demand, with wheat futures reacting downwards to meet domestic US demand.

Alternatively, the corn price could be on the low side and the ratio could as a result of a move to higher corn pricing. The key will be to watch the corn ratings, over the next two months.