Large stocks temper optimism about help from future exports

Since the passage of the Federal Agricultural Improvement and Reform Act in 1996, farmers have been planting more acres of their crops, but mostly enjoying them less as prices moved lower and lower.

The lone exception has been wheat. Since the 1995-96 season, when the average price per bushel hit $4.55, growers have reduced their wheat plantings from 75.6 million to 62.8 million acres.

"We've lost 13 million acres of wheat," says David Kenyon, a professor in the Department of Agricultural and Applied Economics at Virginia Tech. "That's because we replaced a $4 target price with a $2.58 loan. So, it's flexible. They flexed right out of that one real fast."

Speaking at the Southern Regional Agricultural Outlook Conference in Atlanta, Kenyon said that while wheat acres have been dropping across the United States, the total supply has continued to grow.

"Which 13 million acres did we lose?" he asked. "The worst. If you look at the yields, you see they have continued to go up. We got another 41-bushel-per-acre yield this year.

"Basically, we lost all these acres, but the yields have consistently been up. So, in terms of total supply, we've added quite a bit because there has been little change in exports. We end up with more stocks and have lower prices." (See accompanying chart.)

Outside the United States, world stocks are beginning to decline from their high of 140 million metric tons in the 1997-98 marketing year. "Thus, there is some optimism we may get a chance to export more wheat this year."

But any optimism about exports must be tempered with the reality of U.S. ending stocks, which are now forecast at 976 million bushels. USDA projects 2000-01 exports will total 1.125 billion bushels, but Kenyon believes U.S. exporters will have a tough time making those numbers.

"We're about a third of the way into the marketing year, and exports are about 40 million bushels less than at this time last year," he said. "I would not be surprised to see USDA lower the export number in one of the next reports.

"So, this (1.125 billion bushels) number is probably a little high, which means the ending stocks number is a little low. We may end up getting to a million bushels in ending stocks, which is not good for price prospects."

Based on historical price trends, Kenyon has been recommending that Virginia wheat growers take their loan deficiency payment in the first two weeks in July.

"Typically, our low occurs around the first of July," he noted. "We get good increases to January and then it just sort of flattens out. Given that this year's prices were very similar to last year, our advice this year was to take your LDP the first two weeks in July."

Although few farmers do it, storing wheat and hedging or forward contracting the price could net producers a few more cents per bushel - if current price trends continue this fall.

"Back on June 12 when we were just starting wheat harvest, December futures were at $2.94 per bushel," said Kenyon. "The cash then at Wakefield, one of our markets in southeast Virginia, was $2.11 - 83 cents per bushel under December futures. The average basis for Wakefield in December is 34 cents per bushel.

"That would mean a basis change of 49 cents per bushel, so storage could have made you 26 cents per bushel if you had stored until December" (subtracting the estimated 23 cents per bushel cost of storage for six months).

On the other hand, if a grower had sold his wheat in June and bought a $2.90 December call option and paid a premium of 21 cents, that call option would have been worth 2 cents at the end of September. "So, storing the wheat and hedging or forward contracting it has been the strategy of choice, so far."

Kenyon noted that Memphis, Tenn.-based Sparks Commodities has released a new forecast that says wheat acres could be down another 1.5 million in 2000-01. Whether that decrease will mean improved prices for wheat remains to be seen, he said.