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Wheat to battle corn, soy for 2008 acres, analysts says

Each wheat crop is unique in its own way, but for wheat farmers the 2007/2008 wheat crop year has started out to be one of the most unusual in memory.

Hammered by drought, the 2006/2007 wheat crop was the smallest since 2002/2003, and U.S. ending wheat stocks of just 456 million bushels were historically low. Wheat prices climbed in reaction to tightening supplies.

The national average farm gate price for wheat during 2006/2007 was $4.26 per bushel, about $0.85 higher than the prior year. Attractive prices induced U.S. wheat growers to expand their 2007/2008 wheat area by more than 3 million acres giving rise to predictions that potential production could reach close to 2.3 billion bushels or nearly 500 million bushels more than last year's small crop.

A number of things happened to change the outlook for the U.S. wheat crop in 2007/2008. Winter wheat acreage did expand as anticipated, and for a change, fall moisture levels were adequate. As winter wheat emerged from dormancy in February and March, crop prospects for both hard red winter wheat and soft red winter wheat (SRW) were excellent. However, a hard freeze during Easter Weekend in April caught large areas of HRW and SRW in the joint stage.

At first, it was thought damage was minor. Later on it became clear that the freeze had cut winter wheat production by 50 to 80 million bushels. Then, just as hard red winter wheat (HRW) was reaching maturity, monsoon-like rains came. Beginning in early May the area from south-central Texas northward through most of Kansas, the heart of HRW country, was inundated by wave after wave of heavy rains. The rains continued throughout May and June and well into July. Those early good prospects dissolved into a soggy mess.

We will not know the full extent of the losses from the freeze and the incessant rain nor how much HRW acreage was abandoned until USDA's September crop report. At this writing it seems clear perhaps as much as 250 million bushels of potential US wheat production was lost. A portion of what remains is of such low quality it will be used for feed.

Last spring's wheat market appeared to offer a great opportunity for Northern Plains growers to increase spring wheat planting. However, the red hot corn and soybean markets offered even more encouragement to plant those crops, and some spring wheat land was seeded with soybeans or corn causing spring wheat acreage to drop below last year.


As wheat growers look ahead to fall and the seeding winter wheat, they will once again note the impact of another small U.S. wheat crop. USDA last estimated the 2007/2008 U.S. wheat carryout on May 31, 2008 to be a very tight 418 million bushels, the lowest level in 30 years. It may be even less than that. And once again, markets are likely to encourage larger winter wheat acreage.

The U.S. is not the only wheat producing country with production problems. Ukraine and Russia suffered drought that cut their winter wheat production. Presently, Ukraine has suspended the issuance of wheat export licenses to insure that domestic supplies are adequate. The European Union wheat crop suffered its own problems with too much rain falling on ripe wheat in France and Germany and production estimates falling. Canadian farmers cut their spring wheat plantings back sharply in favor of canola. Australia is trying to recover from last year's devastating drought, but its wheat crop will not be available until early 2008. The Argentine government is facing an election this fall, and it has suspended wheat exports in an effort to hold food prices down.

In short, in 2007/2008 the world's total wheat production will be around 605-610 million metric tons compared with earlier projections of 625 million metric tons. That will fall 10-15 million metric tons below projected world wheat use in 2007/2008. Thus, world wheat stocks will continue to decline as they have most years during the past decade. World wheat stocks of an estimated 110 million metric tons are half of what they were just a few years ago. Clearly, this trend is unsustainable, so something must happen to change it in the very near future.

Not surprisingly, wheat markets have experienced growing price volatility. From both a U.S. and a world perspective the stage is set for that volatility to continue and perhaps grow even more severe.

Charts show how erratic and occasionally explosive the wheat market has been so far during 2007. The spot contract hit a high of $6.32 per bushel on June 29. The record high futures price was $7.17 per bushel set in April, 1996. Intra-day volatility is extraordinary too. Daily trading ranges of 20 cents per bushel and more have become common. This market is not for the faint of heart, nor for anyone without a hefty balance in his checking account.

In simplistic terms, the task of a fundamentally bullish wheat market such as we face now is to achieve a price level that will induce growers to seed enough additional wheat acreage in the next crop cycle, so that supply and demand can be brought into some sort of balance, Mother Nature permitting, of course. But the situation is far from simple. The fact is that based on projected demand for 2008/2009, the corn market also will need to reach prices that induce even larger corn acreage next spring. As well, the soybean market will need to reach prices that encourage a substantial increase in soybean acreage next spring.

There will be the need for a combined total of 8 to 10 million additional acres of wheat, corn and soybeans for 2008/2009 with about half of it needed for soybeans. This is the requirement if projected demand is to be met and ending stocks are to be at more than pipeline levels. In a few months the pressure on USDA to ease rules allowing early exit of land from the Conservation Reserve program (CRP) will likely become intense as concern about finding enough land to accommodate all the needed crops grows.

The issue of whether or not enough additional cropland can be found to meet the needs of 2008/2009 cannot be resolved today. But what be said with a fair degree of certainty is this. The struggle among the wheat market, the corn market and the soybean market as each seeks to assure enough supplies is sure to be classic and likely to be explosive. They will eventually sort it all out as markets always do. Students of markets will be lined up to watch how it happens.

Each wheat crop is unique in its own way, but for wheat farmers the 2007/2008 wheat crop year has started out to be one of the most unusual in memory.

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