In the past week, the average basis level for soft red winter wheat improved 9 cents to 41 cents under the Chicago December futures, while the average cash price dropped 45 cents due to a sell-off in the futures market. At the same time, the corn basis lost 1 cent to 28 cents under Chicago December futures with the average cash price falling 65 cents also due to a weaker futures market.

At first glance, it makes sense that the wheat basis would move higher and the corn basis lower because corn harvest is at hand and wheat movement is usually put on the back burner because elevators don't have the room or time to deal with it. What is notable about the difference between the cash price of corn and wheat is a week ago, cash corn was a 17-cent premium to wheat. Today, wheat is a 3-cent premium to corn. The cash spread between the two commodities is back to more of a historical level, which could mean a turnaround in SRW wheat use as a replacement for corn in feed rations. A deeper look into this situation may tell us if this is just an aberration due to corn harvest pressure, or the start of a trend.

Since the cash price of wheat just moved over the cash price of corn in the past couple of days, indications are that last week's USDA grain stocks and small grain summary reports may have something to do with the change. The grain stocks report showed both corn and wheat stocks higher than expected, which resulted in lower futures markets for both commodities. The small grains summary showed an overall decrease in wheat production, but soft red winter wheat production actually increased about 6 million bushels. The higher grain stocks for wheat indicates less usage, which is really not news, since poor export demand has been and continues to be a problem. The wheat numbers won't do much for supply and demand other than increase ending stocks. Soft red winter wheat's stocks-to-use ratio is currently hanging around 43.8% and will likely move higher.

Corn stocks as of Sept. 1, were estimated at 1.128 billion bushels, well above trade estimates that averaged 964 million bushels. This was reminiscent of last year when USDA raised Sept. 1 stocks 300 mb more than trade estimates only to find out later that early harvested new-crop corn was included. Nonetheless, this estimate is our ending stocks for 2011 and carryover into the 2012 crop year. Last month, the beginning stocks for the new-crop year were estimated at 920 mb, and this month beginning stocks will be raised 208 mb. If corn production remains the same or, as some analysts are indicating, moves higher, there would no doubt be adjustments on the demand side to give back some of the 400 mb reduced in the September supply and demand report. Two hundred million bushels of the 400 mb reduction was for feed use, and if some of that is put back into demand, then wheat usage for feed will likely decline. If that happens, then there will be a larger carryover in SRW wheat than currently estimated.

Getting back to our original premise, the answer will depend on how USDA views supply and demand for corn. If feed use is not adjusted higher, then demand for SRW wheat for feed will likely remain steady; however, if corn for feed use is increased, then demand for SRW wheat for feed will be reduced, and more wheat will be available for milling and export, which to this point has not be very strong. It is really kind of perplexing because less demand for SRW wheat is bearish, which will push cash prices lower as it adds to supply when the likelihood of increased exports and milling use is minimal. On the corn side, increased stocks from carryover and possibly production, will likely result in adjustments on the demand side that could come from ethanol use, exports and feed use, which would provide some price support.

Bob Bailey can be contacted at bob.bailey@telventdtn.com

(BS/AG)

© Copyright 2011 DTN/The Progressive Farmer, A Telvent Brand. All rights reserved.