Even the most casual grain market observer will be aware of the impact of corn on cereal prices. It typically involves a market report with a phrase such as “wheat rose on the back of CBOT corn futures pushing up 10c per bushel”. But how does a grain crop that barely registers a blip on the Australian production radar influence our prices so much?
The first thing to understand is that corn is the largest crop in the world. It supplies more digestible energy than any other domesticated plant. The second thing is, it’s not humans that consume the vast majority. Of the 1.2 billion produced annually, well over half is wolfed down by animals, another 20% (roughly) is fed into industrial processes, such as ethanol production for fuel, with the remainder being consumed as human food (if you call corn syrup, popcorn and corn chips food).
Corn is consumed by both ruminants and monogastrics but it’s monogastrics where it reigns supreme, particularly in Asia, where it is the primary energy source in chicken and pig feed. Accordingly, corn demand is linked to meat demand in some of the world’s most populous regions.
Although animal feeds are quite substitutable, corn is so large a crop that, even if prices doubled, there are not enough replacements to make a significant impact on supply. It will still have to go into the ration. But animal feeders, being a canny lot, will be doing anything they can to minimise the financial impost. They’ll stuff in as much wheat, barley, hay, straw, DDGS, sorghum and any other substance that an animal might nibble on, as long as it is cheaper.
And what will that do? Lift the prices of those commodities. Hence, we get the adage that wheat follows corn and barley follows wheat etc. As soon as the commodity spreads lead to nutritional arbitrage, feed mills and feedlotters buy the cheaper commodity.
The issue for Australian farmers is that the corn ‘complex’ is unfamiliar and difficult to follow. It’s a true summer crop that is different agronomically, seemingly alien in its pollination via ‘silks (the plant is a C4 grass whereas wheat and barley are C3 grasses). It grows in areas supported by supply chains we are not familiar with and, if in America, is measured in bushels - 39.3679 of which are needed to make a tonne, to defy easy mental arithmetic.
The good news is that, mostly, WA grains are driven by food markets (specific feed grades excepted) so, if corn bounces around a few points in Chicago, it generally doesn’t impact wheat and barley on the far side of the globe, as two-minute noodles and beer contain exactly 0% corn.
However, this changes when corn goes on a tear and that tonne of barley destined for a Chinese malthouse is shuffled off to the feedmill instead. When APW1 goes down the same road, you know your corn is getting hot. The main thing that tells you whether feed markets (i.e. corn) is leading is when the spreads between grades within a commodity are based on animal nutrition, not food functionality. That’s when ‘wheat is wheat’ with nary a buck or two between H2 and ASW1.
Although that is exactly what is happening to WA grain prices at the moment, it has nothing to do with the price of corn. The lack of unsold 23/24 harvest grains domestically, in a record setting dry spell, means demand for feed locally is outstripping supply and that’s dragged all grades up to the same nutritional value pricing mark. Corn prices be damned.
There is always an exception to every rule!
