It's a long time from now until winter wheat harvest next May and June. And wheat farmers may need every one of those eight months to find an opportunity to market their crops at better prices.
Although growers planted fewer acres of wheat in 2004-05 — normally a positive sign for prices — the market is sending out contradictory signals because of production increases outside the United States, says Kurt M. Guidry, an agricultural economist with the LSU AgCenter.
Plantings of all classes of wheat fell by 2 million acres in 2004 to 59.7 million, the lowest level in the United States over the past 20 years, he said. Along with fewer acres, slightly lower yields are expected to decrease total production by 214 million bushels to 2.12 billion.
“While production has not been an overwhelmingly negative factor in this market, continued struggles on the demand side of the equation have limited price potential,” says Guidry, a speaker at the 2004 Southern Region Agricultural Outlook Conference in Atlanta.
The real culprit on the demand side, says Guidry, has been export sales. “Despite improved export sales during the 2003-04 marketing year, larger world stocks and increased competition are expected to place wheat exports below 1 billion bushels for only the third time in the past 15 years.
“U.S. exports are expected to fall by 209 million bushels from the previous year to 950 million bushels. While domestic demand is expected to improve moderately, the pessimistic outlook for exports is a real concern for this market.”
Although U.S. production has declined, the world wheat crop is expected to reach a record 610 million metric tons for 2004-05. Increased yield prospects in the Ukraine, Romania and several countries of the European Union will mean more competition for U.S. wheat exports.
Growing world consumption could help offset much of that increased production, but world ending stocks are forecast to be up by more than 7 percent from the previous year.
“While increasing stocks is never a positive for a market, world stocks are still relatively tight,” says Guidry. “During the 2003-04 year, world wheat stocks fell to the lowest level since the 1982-83 marketing year. That tight stock situation has helped provide support to prices over the past year.
“Stocks are expected to increase, but 142 million metric tons is still the second lowest in the past 20 years.”
The wheat market gained some support from delays in harvesting the spring wheat crop. Farmers in the upper Midwest and Northwest had gathered 81 percent of the crop as of Sept. 20, compared to 100 percent of it at the same time last year and an average of 94 percent over the last five years. Minnesota and North Dakota, two of the major spring wheat-producing states, were only 70 percent through — nearly three weeks behind their normal pace.
“The delay in harvest brought questions about spring wheat quality and quantity,” says Guidry.
Wheat prices, he says, have also drawn support from the surprising performance of export sales through the first four months of the marketing year (May-April). Sales have been matching the pace set last year.
Winter wheat plantings, meanwhile, will likely start pressuring wheat prices. This year's unusually dry September weather allowed farmers to get a jump start on the 2004-05 winter wheat crop.
“The quick start to planting, along with generally favorable moisture levels in major wheat-producing areas, left little concern regarding winter wheat production,” Guidry notes. “A continuation of favorable planting and growing conditions would likely add pressure to prices.”
The potential for good crops in other parts of the world and the potential for lower export demand longer term could put a damper on prices into next spring, he says.
“With new crop futures currently trading in the $3.40 per bushel range, it is highly unlikely winter wheat acres in 2005 will decline sufficiently enough to bring concerns about production shortfalls,” he notes.
Long-term trends are not favorable either. Over the past five years, the new crop July wheat futures contract has fallen an average 46 cents per bushel from the first week in October to the last week in June.
“With the pressures of record world production, reduced export demand and the progression of the winter wheat crop, it is highly unlikely this market will see appreciable price improvement by the time the winter wheat crop reaches the market next summer,” Guidry says.
“For prices to improve substantially, production shortfalls likely would be needed. With world stocks still relatively tight, the potential for price strengthening on any such production shortfalls would be magnified.”