Looking to the Futures

Historic trading relationships between these two futures (/ZC and /ZW) have remained in a strong correlation over the long-term supported by global macroeconomic trends, harvest conditions such as annual weather patterns, and being natural substitutes of each other for end consumption purposes.  However, there are times when this strong correlation can decouple and become weaker than historic norms.  Contributing factors causing a divergence mainly are geopolitical vulnerabilities and a spike in distinctive demand driven end uses.   

There are key differences in the growing processes for corn and wheat.  They have different climate needs, planting methods, growth cycles, and harvesting equipment.  Corn is considered a C4 (4-carbon molecule) plant which can best be described one captures CO2 more efficiently than that of a C3 (3-carbon molecule) during photosynthesis.  Corn (/ZC) requires a longer and hotter growing season, typically planted in the spring season and harvested in the fall.  Wheat has different varieties, but winter wheat (specifically soft red winter /ZW) is planted in the fall and goes dormant in the winter to be harvested in the late spring to early summer seasons. 

Crude oil (/CL) has been known to influence the corn and wheat markets due to the commodities impact to production and supply chain costs.  Higher crude directly translates to higher operating expenses of going through the growing and harvesting process for farmers.   

The United States Department of Agriculture (USDA) published the World Agricultural Supply and Demand Estimates report (WASDE) on November 10th.  It cited lower U.S. corn yield expectations by lowering bushels per acre (bpa) to 179.6 versus October’s 181.2. Total U.S. production was cut by roughly 141 million bushels to 15.893 billion bushels.  After the report was released, we saw corn find a floor and push higher. Historically, when the anticipated corn yield is lowered you will see corn and wheat’s correlation strengthen. As the price of corn pushes higher due to supply constraints, those who use these two commodities as substitutes will switch to wheat thus increasing demand and pushing prices higher simultaneously. 

Recent weather conditions along the US Corn Belt contributed to the WASDE report coming in with lower yield expectations.  Colder temperatures and higher precipitation levels caused delayed harvests.  For example, Iowa saw its 4th-wettest September in 154 years. 

If there weren’t significant geopolitical vulnerabilities right now, specifically the Black Sea chokepoint due to ongoing naval attacks between Russia and Ukraine, then the correlation between these two commodities would likely be stronger.  According to the prior year’s data published by the USDA, Russia is the 4th largest producer of wheat globally with 90.3 million metric tons while Ukraine ranks 10th at 24.1 million metric tons. 

Prior to the conflict between Ukraine and Russia, roughly one-third of all global wheat exports passed through the Black Sea region.  This major chokepoint has seen much lighter traffic but is somewhat offset by stronger than expected harvest prospects in Canada and South America. Recent peace talks in Abu Dhabi mediated by the U.S. ended with Russia and Ukraine immediately resuming mutual attacks at the end of the trilateral meet. 

If the two sides are able to come to any agreement regarding the Black Sea, then the correlation between these two commodities should strengthen as they are able to get back to supply-demand based price discovery.

8:30 AM- Ex-Food & Energy PPI, M/M%

8:30 AM- PPI

12:00 PM- San Francisco President Mary Daly participates in University of Nevada event

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• Ripple (/XRP)
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• 100 OZ Silver (/SIC)
• 1 OZ Gold (/1OZ)
• Solana (/SOL)
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Visit the Schwab.com Futures Markets page to explore the wide variety of futures contracts available for trading through Charles Schwab Futures and Forex LLC.