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U.S. wheat market seen strong through late October
Wheat is pretty hot right now.
Tight global stocks and this week's limit-up trading are raising a lot of questions about where the wheat market will go this fall and more importantly, how any movement may affect acreage in 2008.
The short answer, says one economist, is the market should stay bullish at least through late October. At the same time, wheat acres may not see the drastic bump some have predicted moving into this fall. Why?
First, it's important to know what's led to today's $8.00-plus U.S. wheat market. Upside fundamentals have been developing for years leading up to the recent wheat rally, according to Bill Tierney, vice president of research and marketing with John Stewart and Associates.
"It's the accumulation of about three years of fundamental development. We've been working down the global stocks for a while," Tierney says. "But certainly in the last three years, the most noteworthy thing is that this is the second year in a row that one would have to say that global wheat yields have fallen sufficiently below trend.
"The combination of two years of global yields falling and continued reduction in global stocks relative to use pretty much explains where we are today. There was no shortage last year or this year in global wheat acres."
The wheat market will likely stay bullish for about the next two months, Tierney says, largely because of attention to a few factors important to the U.S. winter wheat crop's early development and the final output of the Australian crop, which should be clear by later this fall.
"The market will remain high -- if not go higher -- until late October and early November. The market will have a firm handle on southern hemisphere production by that time," Tierney says. "There will also be a firm handle on anticipated global demand and winter wheat seedings of the 2008 U.S. winter wheat crop. Keep in mind, too, we have huge winter wheat crops in China, North America, the European Union and the former Soviet Union.
"I basically think the October-November-December time period will be the final determinant."
Any market movement at that point, though, may be premature in terms of its correlation to the U.S. crop's conditions, the economist says. Agronomically, these adjustments aren't made until the first months of 2008, when the crop's shape coming out of dormancy can be seen.
"There's a very weak correlation between final winter wheat yields and condition of the crop before it goes into dormancy. Spring weather is the primary determinant. Even if tiller numbers are cut back, the remaining tillers will produce bigger heads," Tierney says. "If it goes into dormancy in poor shape, you can say you won't have record yields, but you certainly can't say you'll have poor yields."
Consequently, in January and February of next year, Tierney says another upward move could be seen in the wheat market if any winter-kill is observed. Another bump could follow in April, as post-dormancy crop conditions become clearer.
You might think an $8.00-per-bushel-plus wheat market might incent an immense shift to more wheat acres in 2008. Overall acreage will increase slightly, Tierney says, but not as much as some estimates this year indicate. John Stewart and Associates analysis shows an acreage bump coming, but it will be tempered by the ongoing fight for acres with corn and soybeans.
"Looking at the numbers by state, and considering cotton, grain sorghum, wheat, corn and soybeans, we're saying possibly along the lines of a three- to four-million-acre increase in total wheat," Tierney says. "We are looking for lower corn and higher bean acres all over. Wheat may pick up acres from cotton in Texas, the Delta and Southeast. It's literally a state-by-state scenario."
Moving forward into 2008, Tierney says crop inputs will be the determining factor in nailing down acres this year. Using past years' data, per-acre revenue is still highest for corn, at $160 per acre, compared to $130/acre for soybeans and $65/acre for wheat.
But, with expected input price changes -- mainly for fertilizer and fuel -- these shifting numbers may be enough to justify an acreage move.
"Assuming the input usage is the same in quantity, the forecast changes for the 2008 crop show fuel costs up 16% and fertilizer expenditures up 11%," Tierney says. "Obviously, somebody can change those numbers and end up with something else. What if I was a farmer planting corn-on-corn or wheat with double-crop soybeans? I would get different results. Obviously market prices can change that, but input costs are a big factor."
It's clear the fight for acreage between wheat, corn and soybeans -- and lingering drive to plant more corn in the back of many farmers' minds -- is a key factor in the relatively slight acreage increase looking ahead to 2008. Just look at current revenue assurance levels for federal crop insurance, Tierney says.
"If somebody told you three or four years ago that a farmer could buy revenue assurance at $5.80 levels, what would you think? You'd have thought we would have planted every square foot out there to wheat," he says. "What kind of response are we going to see? Still just three to four million acres of wheat expansion. The battle for acreage is keeping it down."
Wheat is pretty hot right now.