Strong wheat prices expected for one more year

The gap between global use of wheat and production has widened, resulting in a draw-down in global wheat carryover stocks, says George Shumaker, University of Georgia Extension economist.

"Lower U.S. wheat production, crop shortfalls in both Argentina and Australia, along with relatively strong demand from traditional wheat importing countries all have contributed to the reduction in ending stocks for wheat," says Shumaker.

These are primary factors, he adds, behind the rise in wheat prices over the last two years and — given the level of stocks — prices should remain relatively strong for at least one more year.

"The High Plains area of the United States had very dry conditions heading into the planting season and unless moisture levels improve during the winter, we can expect lower hard red production in the United States next spring. This implies that a solid bottom exists in the market, and the potential for volatility remains high," he says.

U.S. wheat plantings for harvest during 2003 totaled 60.9 million acres, up from 60.1 million acres in 2002, according to the September USDA crop report. That was the second consecutive year of increased wheat plantings, following six years of declines. Acres for harvest as grain totaled 52.7 million acres, up a remarkable 6.9 million acres from such a slight increase in plantings.

Much of that increase, says Shumaker, is due to a rebound in harvested acres in the Southern Plains, where abandonment was unusually high last year. The increase in harvested acreage bucks a five-year trend in declining harvested acres.

"Growing conditions generally were excellent across the nation as indicated by the record-high national average yields of 43.5 bushels per acre. Wet weather during much of the growing season in many parts of the country fostered vegetative growth that produced multiple large seed heads. The only negative concerning the crop was that wet conditions continued into the harvest period, resulting in some low test weights and sprouting," says Shumaker.

Total U.S. production is pegged at nearly 2.29 million bushels, up sharply from the 1.62 billion bushels harvested in 2002. This is due both to higher yields and an increase in harvested acres. This is the highest total production figure recorded in four years.

Total available wheat supplies for the 2003 marketing year will be up nearly 16 percent from a year ago at 2.864 billion bushels. Carry-in stocks were very tight this year, at 492 million bushels versus 772 million bushels a year ago. The increase in supplies will allow for greater use this year compared to last year, when tight supplies limited off-take, according to Shumaker.

"Total wheat use from the 2003 marketing year is expected to rise from 1.98 billion bushels to 2.22 billion bushels. Only domestic mill use is expected to decline from year-ago levels, down 25 million bushels to 910 million, creating a three-year downward trend.

"Exports are projected to rise sharply, from 860 million bushels to 1.05 billion bushels, reversing a four-year declining trend. Smaller global supplies and a weaker dollar versus other currencies will make U.S. wheat more attractive. Feed use of wheat also will increase from a record low of only 102 million bushels fed last year to a still low — by historical standards — of 175 million bushels."

Wheat ending stocks will rise, says Shumaker, and likely will be near 644 million bushels but will be at the second lowest level since the 1996 crop year. The stocks-to-use ratio would be near 29 percent, meaning that stocks represent 29 percent of annual use.

"The 644 million bushels in projected stocks is a bullish level and may lead to price improvement during the marketing year. Stocks-to-use ratios can be used as a predictor of prices due to the very strong inverse relationship the ratio enjoys to season-average price.

"The season-average price received by farmers should be near $3.25. This compares favorably with the range of prices provided by USDA of between $310 and $3.50 per bushel. It is down slightly from year-ago levels but still attractive compared to the previous five-year average price. Given current cash prices, it is unlikely there will be a deficiency payment available for the crop this year."

Wheat production has declined in importance in the Southeast in recent years, notes Shumaker, given changing cropping patterns and weak prices. However, since wheat is a crop produced by many nations around the world, production can respond quickly to changes in price.

"It is likely that we’ll see expanded wheat acreage not only in the United States and here in the Southeast but in other producing nations as well, in response to improved prices," says the economist.

One aspect of the decline of wheat and other grain production in the Southeast has been the loss of county grain-handling facilities, says Shumaker. Losing local buyers means losing purchaser competition in the marketplace as well as increased hauling costs to the producer.

"An on-going cooperative study of basis patterns for wheat in Georgia and South Carolina has found that wheat basis has weakened by as much as 18 cents per bushel as a result of the loss of buying points and other structural changes in the wheat markets of these two states. The average weakening of the basis was about 7 cents per bushel over the last six years.

The new farm bill provides prices support levels for wheat. The loan rate for the 2004 crop year is about $2.80 per bushel, but it varies by county. The price threshold — at which there would be no counter-cyclical payment — is $3.34.

"That is very near the mid-point of the range of potential season-average prices issued by USDA. So, if the supply/demand scenario plays out as expected, there would be little or no CCP for the 2003 wheat crop."

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