In 2022, almost the only thing certain for U.S. wheat growers is uncertainty. On one hand, several factors since late 2020 have created significant challenges. On the other hand, the run up in wheat’s value offers a glimmer of increased profit potential for growers.
Not All Wheat Makes Bread
Before digging into these challenges and opportunities, it is important to understand that different classes of wheat make flour for different types of food. For example, soft red winter wheat is grown mainly east of the Mississippi River and its flour can make cookies, pastries and snack foods. Bread wheats, including hard red winter, hard white and hard red spring, are produced on the plains from Montana and North Dakota south to Texas. In the Pacific Northwest states, soft white wheat is grown for excellent cake and confectionary flour. Finally, durum wheat grown in the northern Plains and under irrigation in southwest U.S. desert valleys, produces our pasta products.
Production Costs Rising
The same inflationary pressures eating into disposable income are also challenging American farmers. Diesel fuel for seeding, application, harvest and shipping has doubled in price since October 2021. Since mid-2020, the cost of fertilizer needed to grow higher yielding, better quality wheat has more than tripled. Seed and crop protection costs are also up.
According to American Farm Bureau Federation economist Shelby Myers, “many farmers feel these rising input prices are taking away all the momentum provided by the higher commodity prices that were going to help them break even or be just above the bottom line.”
While domestic production does influence wheat prices, what happens in the rest of the world is even more important. Wheat is the most traded grain on the planet.
Wheat prices started increasing in late 2020 as China’s demand for wheat and other commodities increased. In 2021, drought cut wheat production in major exporting countries, including the U.S., Canada and Russia. The Russian government implemented a wheat export tax in an attempt to protect domestic supplies. And, of course, Russia’s unprovoked invasion of Ukraine in March pushed global wheat prices to levels not seen in 15 years.
Rob Davis, a Maryland grain marketing expert, recently said the current wheat market strength is created by widespread supply uncertainty.
“The fact that Russia is the largest wheat exporter and is working to disrupt Ukraine’s ability to export their crop is still the main concern” Davis said.
Adding fuel to the fire are poor growing conditions in exporting countries like the U.S. with drought in the hard red winter production region, in Europe and Brazil. Local crops in Iran, Iraq, Algeria and Morocco have also been poor.
Futures markets in turmoil make it extremely difficult for wheat farmers, the grain handlers and the world’s flour millers to manage their price risks.
“The wheat market will remain extremely volatile for the foreseeable future,” Davis said.
USDA currently expects U.S. wheat export prices to remain at elevated levels and, as a result, total U.S. export volume for the June 2022 through May 2023 marketing year to be well below the 5-year average. In addition, USDA sees global wheat use declining for the first time since 2018 as a result.
Wheat to Sell
In spite of the challenges, after the 2022 harvest is complete, there will be sufficient wheat supplies to meet world needs and still enough to carryover some stocks, albeit a smaller volume, into the 2023 harvest.
“The bottom line for wheat-dependent importing countries in the short term is not necessarily a supply shortage crisis, but rather an economic-financial crisis caused by having to pay much higher prices in the current market scenario,” said U.S. Wheat Associates President Vince Peterson. “It is also a logistical challenge for the world to efficiently move the wheat supplies to places where they are most deficit.”
Yet, for U.S. farmers with wheat to sell, such high potential cash prices are promising. South-central Kansas farmer Martin Kerschen recently said when farmers have paid $1,000 per ton for fertilizer, which is three to four times higher than normal,
they need $13 per bushel wheat prices.
In addition, a recent survey of agricultural lenders by the Federal Reserve, suggests the strong commodity prices have fueled sharp growth in farmland values throughout the Midwest and Plains.
“The value of non-irrigated cropland rose by more than 20% from a year ago in Federal Reserve Districts with a large agricultural concentration,” said the quarterly Ag Finance Update.
Steven J. Mercer Vice President of Communications
U.S. Wheat Associates