In the face of increasing global competition, U.S. wheat producers are and opting to grow other crops that pay better than wheat.
“The world is consuming more and more wheat,” said Jim McCormick, analyst at Allendale, Inc. “And more and more people are producing it. Record demand produced record production.”
USDA estimates 2011 global wheat output at 691.5 million metric tons, up 6% from last year. Ending global stocks are projected to increase 5%, equal to 30% of production. U.S. stocks are heavier than that.
The world's top wheat producers are the European Union, China, and India, followed by the United States in close competition with Russia. Europeans feed a lot of their wheat; China and India need their crops to feed their people. Top wheat exporters are the United States, European Union, Canada, Russia, and Australia, all with similar market shares.
“Last year, Egypt was a huge buyer,” said McCormick. “That's what happened when Russia fell out of the marketplace.” However, Nigeria, Japan, Mexico, and the Philippines are consistently the four biggest buyers of U.S. wheat.
Acres Trending Down but Up This Year
In the United States, “We see a slight uptick in planted acres,” said McCormick at the Allendale Ag Leaders Outlook Conference Jan. 20. Last year, heavy snow and spring flooding cut into acreage. “This year, we should not have a problem getting spring wheat in,” he said.
But Allendale also expects the longer-term downtrend in U.S. planted acres to continue.
U.S. wheat acreage has trended lower since the early 1980s, when exports also hit their peak. Genetic investments favor corn and soybeans over wheat, so trend yields are climbing faster for corn and soybeans than for wheat.
Add declining domestic demand for more than a decade, and market forces have shifted acreage out of wheat.
“In the past five to 10 years, we saw a massive drop in production of spring wheat,” noted McCormick. In 1995, 85% to 90% of planted acres in North Dakota and Kansas grew wheat. Now, that's down to 55% to 57%.
Feed Demand Favors Distillers Grains
The long-term growth in global wheat production and rising stocks have put enough pressure on wheat prices to boost global feed demand. However, USDA's January supply-demand report trimmed domestic feed and residual use from the December projection.
Based on feed cost per 1,000 calories fed, “You're better off to feed distillers dried grains,” said McCormick. But he also said the wheat-corn price spread favors more wheat feeding in place of corn.
Slim Prospects for $7 Wheat
Allendale projects U.S. carryover stocks rising to 45% of use in 2012-13, up from 40% this season but still below the 48% in 2009-10. USDA estimates the current season average cash price at about $7.20, but Allendale projects it to be $6.20 this season, on the way to $5.20 in 2012-13.
Stocks at 45% of use suggest about a $5 average price for wheat, McCormick said. “To get to $7, we need a stocks-to-use ratio closer to 30% , and we haven't seen that in five years. So the odds of $7 wheat are pretty slim.” The only quick way to tighten the ratio is through a production problem.
The Fund Factor
McCormick said funds have been selling wheat because of record supplies and stronger prospects for other investments. Fund positions offer one potentially bullish factor for wheat.
A big swing in currency values or weather could give fund managers a reason to get out of their record short positions. “If you get the funds to push out,” said McCormick, “it will be a race to the door and we will get a nice short-covering rally.”