March 1997
Why the "chutes and ladders" wheat price?
By Randy Johnson
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Prairie Grains is the
official publication of
the Minnesota
Association of
Wheat Growers,
North Dakota Grain
Growers Association,
South Dakota Wheat,
Inc., and the
Minnesota Barley
Growers Association.
Are things different from less than a year ago, when wheat was worth about two bucks more than it is today? Nope! Not really. Supplies of wheat around the world still are historically rather slim. World wheat "experts" are predicting that at the end of this marketing year, the world is going to have about a 75-day reserve of wheat. USDA predicts that here in the U.S. we will carryover about 76 days worth of wheat. In historic terms, the world supply of wheat is still very short.
So, if nothing is different, what is different?
First, we did raise more wheat in 1996. Here in the U.S., in spite of trouble in various parts of the country, we raised 100 million bushels more than the previous crop year. In the world, among us, our competitors and our customers, nearly 2 billion more bushels of wheat were raised in 1996 compared to 1995. When you couple that with the fact that total consumption of wheat will only increase a few hundred million bushels this marketing year, ending stocks are now projected to increase from last year’s record low 376 million bushels to 469 million bushels at the end of the mar
keting year on May 31, based on USDA’s January S&D numbers. World carryover stocks are expected to increase about 400 million bushels to 4.13 billion. Bottom line:1996/97 production and ending stocks are trending in a direction that is opposite from the previous marketing year.
The second difference is in psychology. Before last fall, millers, bakers and all the folks who buy wheat were very sure that we were going to run out of wheat – that their mills and ovens would be shut down—that folks all over the world would be going to grocery stores only to find bare shelves where there once were loaves of bread and cereals.
It didn’t happen. And what’s more, demand for wheat did not go away. In spite of $7 wheat and the lowest stocks-to-use ratios in history, people did not stop buying wheat. And, the market really did not do any rationing. All those folks that were falling all over themselves to buy wheat before we ran out—buyers, millers, bakers and speculators—discovered what many of us have known for years: we don’t need to carry huge stockpiles for wheat stocks to be safe. It will probably be some time before we get into the "panic, oh-my-goodness-we’re running out of wheat, mode" again.
The third and big difference I see today, is that our competitors have been behaving very badly. The European Union, Argentina, and Canada fell all over themselves to sell wheat. Recall that the EU earlier used duties to discourage its own exports, in light of tight domestic stocks. That’s one of the big reasons we mothballed EEP—we didn’t need to use it. But more bushels produced this marketing year prompted the EU to revert to its old export-subsidizing habits.
Meanwhile, the Argentines discounted the price of their wheat to customers all over the world, prompting the Australian Wheat Board to use its own garage-sale tactics. And our friends to the North, the good old Wheat Board, continues to quietly intercept business by offering to sell "at whatever price it takes to get the business."
Not to be outdone, we Wheat Growers have for months been trying to get the attention of folks in Washington, to dust off the EEP program so that we can compete with these lunatics and "fire a shot across their bow." We’re still waiting for the cannon balls.
Fire sales were entirely appropriate when we were carrying a couple years’ worth of wheat inventory. But now, when carryover supplies are near all-time lows, do we need to be beating each other over the head to maintain market share?
Wheat prices will go up. It could be in six months. It could be in two years. But, wheat prices will go up. We will probably not panic and send wheat to $7 the next time, but you can bet that with carryover stocks at a reasonable level, a growing number of mouths to feed and reduced government intervention in agriculture all over the world, markets are going to be volatile. They are going to go up and they are going to go down.
And, if you are an optimist, today’s weaker prices simply mean that: 1) Reduced prices will prompt some strengthened demand for wheat yet before the 1996/97 marketing year ends May 31, and 2) those producers around the world who were lured by $7 wheat into increasing their acreage in 1996 will think twice about planting wall-to-wall wheat in 1997.
Randy Johnson, Great Falls, MT
Executive Vice President
Montana Grain Growers Assn