Montana wheat grower Dale Schuler has waited his entire life for wheat prices to hit $5 per bushel. So why isn't he dancing a jig now that prices have marched toward historic highs?
Schuler paid $1,100 for phosphorus this year, nearly three times the 2006 amount. His nitrogen bill weighed in at $750 per ton, up from $240 per ton, historically. He also paid more in herbicide costs, fuel costs and higher crop insurance premiums to protect his high-value crop.
While many in agriculture have a case of high-price fever this year, wheat producers like Schuler have faced increased risk along with the higher prices. Every single cost category for wheat production is up dramatically from 1998, and two stand out: fertilizer (up more than 200%) and fuel, lube and electricity (up 376%), according to the USDA Economic Research Service (see table, page 36). In the Midwest, Purdue University puts the variable costs of growing wheat up 21%, compared with last year.
"I've never seen anything like it, both the high wheat price and our production costs,” says Schuler, who farms with his two brothers near Carter, Mont., where land values have risen 30% during the past year. "Increased production costs have moved our breakeven from between $3.50 and $4 per bushel to closer to $6 per bushel.”
The reality is that, at some point, wheat prices will come back down, says Daren Coppock, CEO of the National Association of Wheat Growers (NAWG). "Deep in their blood, wheat farmers know that fact because there is ample historic evidence to prove the point,” Coppock says.
"If wheat prices crash while input prices continue to rise, the farm sector is in for a nasty period,” he adds. "This year is a wake-up call for the wheat industry.”
Competitive crisis. Coppock believes wheat has long had a competitiveness problem, but this year's high prices have finally set off alarms up and down the wheat chain. Suddenly, millers, bakers and export customers are asking what the future of the wheat industry will look like.
"If you track wheat acreage and production trends over the past 30 years, we've lost about 30% of the U.S. wheat area to other crops or other uses,” Coppock says. "The beginning of the trendline predates biotechnology and ethanol demand. The U.S. wheat sector is facing challenges to its long-term competitiveness.”
One of the reasons acres have shifted is wheat's past reluctance to adopt biotechnology, Coppock says. Wheat is at a competitive disadvantage with corn and soybeans, for example, where yields are on the uptick due to increased seed technology, he explains. Another reason for the shift away from wheat is ethanol and the demand for more corn acres.
Yet Coppock and NAWG believe there is a greater fundamental reason why farmers are shifting out of wheat into other crops: "In our opinion, growers are making a decision at planting time about what crop gives them the best economic return for the risk, and wheat's not faring well.”
To that point, NAWG has been regularly meeting with millers, technology companies and other industry partners to discuss how to increase wheat's competitiveness. The "Wheat Summits,” as they are called, include discussion on transportation, infrastructure and policy, as well as biotechnology and risk management.
"The higher prices are providing opportunity for us because the whole food chain is focused on making wheat competitive again,” Coppock says.
Soaring food prices and global grain shortages also are bringing new pressures on governments, food companies and consumers to relax their long-standing resistance to genetically engineered crops.
Milling & Baking News, an influential trade newspaper, for example, said in an editorial that companies that use wheat are now paying the price for their own "hesitancy, if not outright opposition,” to biotechnology.
Even in Europe, where opposition to what the Europeans call Frankenfoods has been fiercest, some prominent government officials and business executives are calling for faster approvals of imports of genetically modified crops. The wheat industry is working to get seed companies to restart development of genetically modified wheat and to get foreign buyers to accept it.
Private companies and public researchers remain cautious about investing in biotech wheat research because they fear reluctance to support the technology. Monsanto Company, for example, shelved plans in 2004 to offer its genetically engineered spring wheat to farmers when the project met worldwide opposition from consumers, food manufacturers and environmentalists.
Several steps have been taken, however. Monsanto announced in June that it will establish a $10 million grant to accelerate breakthroughs in the breeding of wheat and rice, although biotechnology was not mentioned.
Immediate threats. As the industry debates development in biotech wheat, it faces a more imminent problem with potential seed shortages. A majority of seed production fields were damaged last year due to drought, sending seed companies scrambling to locate growers with good wheat for seed.
Kansas farmers planted a half million fewer acres of winter wheat for the 2008 harvest, according to the National Agricultural Statistics Service. Dusti Fritz, CEO of Kansas Wheat, a joint venture of the Kansas wheat association and commission, attributes a portion of the acreage loss to a shortage of quality seed after last year's disastrous crop in Kansas.
Time to reinvest. As one who tends the wheat, Schuler believes this is the year the wheat industry needs to reinvest in itself. "My operation couldn't keep going without reinvestment, and the industry is the same,” Schuler says.
With higher prices providing new opportunity, there's no better time for the wheat chain to come together and make wheat competitive again.