Did 2012’s high prices set up wheat for a free fall?
Grain price volatility is nothing new for wheat farmers. The 10-year wheat price chart literally looks like a roller coaster, with big peaks hitting in the spring of 2008, the spring of 2011 and the fall of 2012. In fact, historically high prices this past fall led to the biggest global cereal production year ever this year, according to the United Nations’ FAO.
High supply typically overwhelms demand—and therefore lowers prices. But multiple global factors are making price prospects more complex, says Mark Welch, Texas A&M University AgriLife Extension economist. One factor is a stronger demand due to a 6% per-capita increase in consumption during the past decade.
"It’s true we have a record world crop in the making," Welch says. "But we also have record consumption. There’s a strong underlying demand base and other factors that will contribute to strong wheat prices."
Another factor is a rebounding corn supply, he says. Wheat has been used to fill in the "feeding gap" in past years. If corn supplies recover sufficiently, the wheat price will depend more on its own fundamentals rather than being influenced by corn prices.
"That’s one factor we really don’t know—to what degree are prices being propped up by corn," Welch says.
A watchful look overseas. Welch and other market experts are also keeping a close eye on other major wheat production regions around the world. He says one of the biggest wild cards continues to be the former Soviet Union (FSU-12) region.
"Wheat yields there are increasing over time, but they’re much more variable than production in the U.S.," he says. "More and more, prices will be beholden to what happens there."
Increased wheat production in the FSU-12 accounts for about two-thirds of the uptake in world wheat acres, he says. Another wildcard to consider is India, who in the past has been a large producer of wheat, but not a large exporter. However, based on recent export activity, they could emerge as a new competitor.
Grain marketing adviser Kevin Van Trump says low quality issues in both the U.S. and in several countries overseas need to be taken into consideration, as well.
"Keep in mind that low quality seems to be a theme around the globe right now," he says. "Just look at Germany, who is now suffering some heat damage after already battling too much spring moisture. In an effort to salvage what they can of the crop, reports are that they are harvesting it extremely early, and therefore the protein levels are very low. There is also mixed news coming out of Brazil on the extent of frost damage to their crops, with estimates ranging anywhere from 5% to 45%."
Welch says that with volatile prices, a little bit of perspective can go a long way in tempering expectations. For example, the prospect of $7 per bushel wheat seems disappointing considering the commodity price nearly hit $9 per bushel last November. If you consider the price range since 2007, however, $7 is still a pretty good price, he says.
Van Trump adds that any farmers still holding on to any of last year’s crop might as well hold a little longer.
"If you have waited this long to make wheat sales, then you are obviously a gambler," he says. "Therefore, you might as well call all bets and stick around to see a few more cards."
You can e-mail Ben Potter at email@example.com.