* Corn more than $1 a bu higher than feed wheat in South
* Strong SRW basis amid big CBOT wheat premiums, harvest
CHICAGO, June 10 (Reuters) - A red-hot corn market is spilling over to wheat, especially in the southeastern U.S. where hog and poultry producers are scrambling to cover their feed needs through the summer, grain traders said on Friday.
"What we are finding is that they want and need wheat," said Roy Huckabay, an analyst with The Linn Group in Chicago. "They are feeding wheat. They are going to feed a lot of it."
Corn, which promotes the best weight gains, is the usual basic ration for most livestock. But wheat, especially lower proteins like the soft red winter wheat grown in the southeast, is often substituted when the price is right, like it is now.
The demand is reflected in the unusually strong soft red wheat cash market in the Southeast, where spot bids are spiraling higher despite the onset of harvest, a time when cash bids typically slip as fresh supplies move into markets.
Spot SRW cash wheat prices in North Carolina -- home to big poultry and hog operations owned by Sanderson Farms (SAFM.O), Tyson (TSN.N) and Perdue's contracted chicken producers -- late this week wheat averaged $7.10 a bushel, compared with corn selling for $8.40 at feed mills. Two weeks ago, corn was at $7.85 and wheat about $7.25.
SRW wheat, mostly used to make snack foods, typically runs at least $1 higher than corn, a much bigger grain crop.
"North Carolina doesn't have any corn. So basically they are doubling the amount of feed wheat they were planning on buying -- that's why they're not backing off," said one North Carolina grain merchant who sources feed for local feeders.
"They have not backed off one iota. They are buying wheat at 105 (cents) over July corn," added the merchant.
Spot corn futures Cc1 hit an all-time high in the spot contract of $7.93 and an unusual 40-cent premium to wheat after the U.S. Agriculture Department on Thursday issued its latest crop report, repeating its forecast for the U.S. corn supply to fall to 15-year low by the end of current marketing year on Aug. 31.
Corn futures hit a record for a second straight day on Friday at $7.99-3/4.
Next year is also looking uncertain since it appears U.S. farmers will not get as much corn planted as they intended due to spring flooding in the central U.S. while corn in the deep South is burning up amid little to no rain in the past month.
If that wasn't enough, add in big premiums offered in the Chicago Board of Trade soft red wheat market making it profitable to buy wheat and hold, or "carry," it for months.
CME Group Inc's (CME.O) variable storage rate scheme to improve its Chicago Board of Trade wheat contract of raising storage fees has put the storage fee at 20 cents a bushel a month, up from about a nickel a year ago.
"Feed buyers still have the $1 carry in SRW to December futures to contend with. Basis has to be high enough to keep that wheat from going into storage in the country to earn the VSR return. But the wheat/corn discount does help," said Diana Klemme, vice president with Grain Services Corp in Atlanta.
Huckabay added: "It just all comes back that there is so much carry-in (wheat) futures that everybody wants to buy and sell it for something next year or next month." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Chicago July/July 2011 wheat/corn spread
Chicago July/Dec 2011 SRW wheat spread
"GET RID OF OLD WHEAT, STORE THE NEW"
The CME is getting ready to make another change to its wheat contract that is affecting the cash market. Starting with its September contract, delivered wheat testing 3 parts per million with vomitoxin -- a common toxin in wheat caused by a fungal disease -- will be discounted 12 cents a bushel.
"As long as those guys can buy the wheat at some kind of equilibrium or discount to corn, they are buying wheat," said one veteran CBOT wheat broker referring to eastern poultry producers. "Corn out there is ridiculous."
It will be months before the fresh corn supplies move into U.S. grain elevators. But the soft red winter wheat harvest is well under way in the South and moving north. Early harvest reports indicate good quality wheat, traders said.
"They also can feed vomitoxin wheat that is somewhere up to 3 or 4 or 5 parts per million to chickens and turkeys, to the extent that there's any of that around," the broker said.
"And we are changing the deliverable spec -- it makes a lot of sense for anybody that's got that stuff to go ahead and sell it and get rid of it. Get rid of old wheat, store the new wheat, and start over." (Reporting by Christine Stebbins, graphics by Gavin Maguire, additional reporting by Bob Burgdorfer; Editing by Marguerita Choy)