Coping in Today’s Wheat Market

USW’s Vince Peterson examines several hot-button wheat issues

U.S. Wheat Associates (USW), Washington D.C., is the primary market development organization working in 90 countries on behalf of America’s wheat producers. The activities of USW are made possible by producer checkoff dollars managed by 18 state wheat commissions (including the Minnesota Wheat Council, South Dakota Wheat Commission, North Dakota Wheat Commission and Montana Wheat & Barley Committee), and through cost-share funding provided by USDA’s Foreign Agricultural Service.

In this interview, which appeared in the “Milling Journal,” Vince Peterson, USW vice president of overseas operations, looks at issues U.S. millers are facing in this unique wheat market.

The U.S. wheat market is one of the few open markets that exist in the world. In a short supply situation overseas, demand for U.S. wheat has been high. However, I do not think the U.S. milling industry will see a shortage of wheat because of our open market.

Obviously, millers all around the world are dealing with unusually high prices.  U.S. millers probably had to be more astute at managing price risk and invested a lot of capital into wheat stocks at a very early time in the season.

That being said, U.S. millers still have a significant competitive advantage over foreign buyers because they have immediate local access to a wide range of domestic supplies – and they don’t pay as much for transportation compared to record high ocean freight rates.

Canadian wheat: On a side note, I would think that many U.S. millers may be nervous about the Canadian wheat Board’s (CWB) monopoly over exports to the United States.

Canadian stocks are slightly lower this year compared to last year, but the CWB seems to be restricting exports disproportionately.  My guess is the CWB is driving with its foot firmly on the brake and keeping their prices artificially high to U.S. millers.

Restricting Wheat Exports
Although many countries are restricting exports this year, I would be very surprised to see something like that happen with U.S. wheat.

I certainly don’t think the government will stop wheat exports.  First, legislation enacted after the Russian Grain Embargo and several export statutes since then prevent the government from singling out agricultural products in an embargo situation.

I also don’t think such a decision would be either economically or politically popular.

In our open market, price increases will take care of wheat rationing. In fact, export demand is slowing down now because many buyers are well-covered and crops from the Southern Hemisphere are now coming to market.

Wheat Acreage Increase
Written prior to Winter Wheat Acreage Report - Jan08

Over the past two to three years, we have seen wheat plantings increase after several years of decline.

Higher wheat prices and very low world stocks should be a catalyst for even more production.

The U.S. Department of Agriculture’s October Crop Production Forecast, for example, predicts wheat plantings will increase by 4 million acres or 6% over last year.

Soybean prices are also high right now, so there will be shifts from corn acres. I think some of that increase will be double cropping in the soft red winter (SRW) wheat area.

Hard red winter (HRW) wheat production should also show some gains again this year following the relatively large increases in planted acres last year.  White wheat now shows a price premium over HRW, so growers in the Pacific Northwest will shift some HRW acres back to soft white production.

More stocks ahead: For the past five years, wheat yields have generally been below average.  If we can pull the yield numbers up and these early planting intentions pan out, I think the tight U.S. stocks situation will probably correct itself and we’ll be back up to a more comfortable level a year from now.

New price point: At the same time, I think the United States and the rest of the world will have to get used to higher wheat prices.

When you look at the price volatility that biofuels demand has helped create in the grain markets, wheat prices will have to increase for the crop to stay competitive.

While the current price of wheat, in the $8-$9 range, is unusually high, I think millers can expect wheat to trade at a higher range than the previous average of $3.50 to $4 per bushel. We think prices at around $6 per bushel will be very likely.

Transgenic Wheat
There is some concern about maintaining a reliable supply of wheat and, in fact, the world has produced less wheat than it has used in seven of the last ten years. I think that is why the U.S. wheat industry and its customers are talking a lot about the role of biotechnology in developing new wheat varieties.

The extraordinarily high prices have definitely opened the door for more discussion.  Yet I don’t think price will be the single determining factor in gaining acceptance of transgenic wheat around the world.

In Japan, for example, wheat flour is relatively expensive and consumers accept that. Instead, the Japanese and several other countries have expressed concerns about food safety – largely because milling wheat is a food grain.

On the other hand, a reliable supply is more important to other large wheat importers like Nigeria and Egypt, which have food security at the forefront of their public interest.

The U.S. wheat industry believes its producers should be able to use new technology to help them be more efficient. At the same time, the industry supports customers who want to buy specific traits.  Addressing both is what this discussion is all about.

Reprinted with permission from the fourth quarter 2007 issue of Milling Journal.