By Julie Ingwersen and Mark Weinraub
CHICAGO (Reuters) - The surprise drop in U.S. corn feed demand this summer may be only the beginning of a year-long reduction as chicken and hog producers break a long-held aversion to blending more wheat into rations.
What initially began as a summer fling with an unprecedented premium for corn prices over wheat has turned into an enduring trend as livestock producers lock in longer-term wheat deals -- many of which can't be quickly undone even as the corn price premium finally recedes.
Some livestock producers initially resisted the switch, fearing it would slow weight gain of their animals, or disrupt the eating habits. Now they have embraced its financial benefits, injecting a new dynamic into grain markets.
"We are going to continue feeding (wheat) so we can stretch the corn crop through the whole season. I think (corn) availability is going to be an issue this coming year as well," says Tim Thomas, an independent pig producer in Timberlake, North Carolina, who has been using a 50-50 mix.
"Some groups of hogs won't like the flavor as well as they will straight corn, but normally we can blend up to 50-50 and don't have any problems getting them to eat it," he said.
In most years, wheat feeding is a short-term phenomenon that occurs in June, July and August, after the U.S. winter wheat harvest. But some U.S. chicken and hog producers are looking to extend their use of feed wheat throughout the year.
The implications run deep into the corn market, which has slumped 12 percent since September 1 on signs that "demand rationing" -- essentially consumers being priced out of the market -- is far more widespread than believed.
In April, wheat futures on the Chicago Board of Trade dipped below corn for the first time in nearly 15 years. Since June, CBOT wheat has been trading at an average of 10 cents below corn, the longest such inversion since at least the early 1970s. Cash prices were at times even more favorable for wheat buyers.
Wheat prices have periodically rallied back above corn, including as recently as this week, but the change in feed habits should stick.
"We hear of wheat feeding being booked all the way through the spring in the southeast markets," said Rich Feltes, vice president for research with R.J. O'Brien in Chicago.
A DIFFERENT MIX
The changing feed mix follows a summer in which U.S. corn stocks threatened to shrink to near their tightest since World War II. Corn prices surged to a record above $8 a bushel, while swelling global wheat supplies depressed prices.
In the United States, plentiful supplies of wheat -- especially soft red winter wheat grown in the southern Midwest -- provided a welcome alternative for livestock feeders in the Southeast.
Nutritionally, wheat offers more protein than corn but less energy from fat, so most operations have to recalibrate rations to accommodate wheat as a substitute ingredient.
Wheat feeding has been less common this year in the big cattle feedlots of the southern U.S. Plains because a drought slashed production of the region's hard red winter wheat crop.
Some cattle feeders were able to book a four-month supply of hard red winter wheat this past summer as local cash corn prices surged, but wheat has become less competitive since then, said Joe Christopher, a grain merchandiser with Crossroads Co-op in Sidney, Nebraska.
Elaine Johnson, analyst with CattleHedging.com, said cattle producers try to ensure they have enough supply to stay switched for six months to a year. Booking large quantities enables them to blend new ingredients into and out of their feed rations slowly, over several weeks.
"They do not want to feed wheat and then a month later go back to the other mixture. It is not something they like to do on a short-run basis," Johnson said.
The U.S. Department of Agriculture on Wednesday lowered its estimate of the amount of U.S. wheat used for animal feed in the 2011/12 marketing year to 160 million bushels, or 8 percent of all wheat production -- but still the highest share in three years.
PRODUCERS FIND IT PALATABLE
Wheat has found favor among large-scale poultry producers.
"We are steadily increasing its usage," said Margaret McDonald, director of communications at Pilgrim's Pride, the No. 2 chicken producer in the United States.
"As long as prices make sense, we will keep maximizing its usage," she added.
Tyson Foods Inc, the biggest U.S. chicken company, has also been using wheat in its feed rations.
"We continue to use small amounts of wheat in some of our poultry complexes," Tyson spokesman Gary Mickelson said.
With U.S. corn stocks expected to remain scarce through 2011/12, setting the stage for another year of high cash corn prices, price signals telling feeders to use wheat could strengthen.
"For the foreseeable future, we are going to have high-priced input costs, and grain is going to be expensive, and the industry is going to have to adjust, which I think it's doing," said Mike Cockrell, chief financial officer for Sanderson Farms Inc, the No. 4 U.S. chicken producer.
Sanderson is not currently using wheat in its poultry rations but has not ruled out adding it in the future.
"There is no doubt that at least for the next crop year, we've got high-priced corn. Until these supplies rebuild and the balance sheets improve," Cockrell said, "that's just a fact of life."
(Reporting by Julie Ingwersen and Mark Weinraub; Editing by David Gregorio)