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Wheat: A Perfect Storm


A perfect storm has struck the wheat industry — but the amount of destruction and carnage is yet to be determined, since the full impact of the storm may be a year or two away. Survival may depend on having prepared for the storm (actions taken the last few years) and office time (analyzing the financial situation and developing a strategy and plans).

The nine wheat marketing years 1999/2000 through 2007/2008 set the stage for higher prices and increased production. During that period, wheat consumption averaged 346 million bushels more than production, and world ending stocks declined from a record 7.7 billion bushels in 1999/2000 to 4.6 billion bushels in 2007/2008.

The perfect storm is the result of use being higher than production, which created relatively high prices, and of good weather that resulted in record wheat production.

In seven of the last nine years (2008, 2009, 2011, 2013, 2014, 2015, and projected 2016), world wheat production has set new records, going from a 22.8 billion bushel record in 2005 to a record of 25.1 million bushels in 2008 — and production in 2016 is projected to be a record 27.3 billion bushels.

A PRICE DRAG

Wheat use between June 1, 2008 and the projected 2016/2017 marketing year is expected to set records eight of the nine years. But during these nine years, production will have averaged 534 million bushels per year more than use. During the last four marketing years, world production has been 2.9 billion bushels more than use.

World ending stocks went from 4.6 billion bushels in 2007/2008 to a projected 9.3 billion bushels in 2016/2017. Wheat prices will not go above $5 until U.S. and world stocks have been significantly reduced.

The major reason for Oklahoma and Texas panhandle prices being in the $2.60 per bushel range is that the world is awash in wheat. In Oklahoma alone, more than 10 million bushels may be in temporary storage (bunkers and bags). Commercial elevators throughout the hard red winter wheat area are short of storage.

On June 1, 2015, the USDA reported 39.5 million bushels of wheat in Oklahoma’s off –farm storage. 2015 Oklahoma production was 98.8 million bushels, and on June 1, 2016, off-farm stored wheat was 70.2 million bushels (a 31 million bushels increase in off-farm storage). Oklahoma’s 2016 production is estimated to be 132 million bushels.

How much will an additional 33 million bushels of wheat (2015 vs. 2016 production) increase June 1, 2017, off-farm stored wheat? What will prices be if the 2017 crop is 100 million bushels or more? $2 wheat is a distinct possibility.

LESS WHEAT NEEDED

Wheat prices near $2.60, compared to $4.50 cost of production, is the market telling producers around the world that production must decline. It is also telling owners of wheat that prices will remain low until the excess is sold to end users.

The salvation for producers is the Market Assistance Loan program. The loan rate does not cover the cost of production, but it does provide producers a price floor and protection from lower prices.

Producers must be careful and avoid trying to pick the price bottom, taking the LDP payment, and then not selling the wheat. Recently, some producers took 11 cent to 13 cent LDPs and didn’t sell the wheat. They have since lost an additional 30 cents.

Poor planting and/or growing conditions (weather) will determine when the perfect storm is over (world wheat production less than 25 billion bushel). For it to be over in the U.S., production losses need to occur in other countries.

Source: Kim Anderson, Southwest Farm Press

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