Problems Elsewhere Lead to a "Stange" Wheat Market
by Ching Lee, Ag Alert Posted on 8/11/2010
With global wheat prices hitting a two-year high in recent days, many California farmers are taking advantage of the current strong market by contracting their crop for next year.
Yolo County grower Larry Hunn said he will be planting more wheat this fall because he has already sold much of his 2011 crop-at much higher prices than this year-even though he is just now finishing his 2010 harvest.
"This market is acting strange," he said. "Here we are at the end of harvest and our prices are continuing to go up. Historically, that doesn't happen. Normally as you get into harvest, you see prices drop."
The run-up in wheat prices has been driven mostly by production problems in major wheat-exporting countries and fears of a supply shortfall. Wheat crops in Russia, Kazakhstan, Ukraine and other parts of Europe have been decimated by drought. Wet weather in Canada also hampered production. Russia, the world's fourth-largest wheat exporter, has cut off wheat exports for the rest of the year, adding to concerns of grain shortages.
"When you see these higher prices, if you're a prudent businessperson, you've got to take advantage of it, no matter what's driving the price," said Hunn, who is also chairman of the California Wheat Commission.
There's no shortage of wheat in California, said Janice Cooper, executive director of the wheat commission. While other parts of the world experience lower crop output this year, California farmers benefited from the extra rainfall this spring and are reaping a bountiful harvest.
She said growers up and down the state report above-normal yields and good-quality wheat, with variable protein levels. According to U.S. Department of Agriculture July estimates, yield for 2010 is projected at 2.25 tons per acre for winter wheat and 3.3 tons per acre for durum wheat, with total production of 787,500 tons. That's compared to last year's yield of 2.4 tons per acre for winter wheat and 3 tons per acre for durum, and total production of 756,000 tons.
Growers planted slightly more winter wheat this year-600,000 acres compared to 590,000 acres in 2009. Planted acres for durum wheat dropped, however, from 180,000 in 2009 to 120,000 this year. Harvested acreage for winter wheat is estimated at 350,000 in 2010, up from 315,000 in 2009, while harvested durum acreage dropped from 170,000 in 2009 to 100,000 this year.
Cooper said she thinks the 2010 estimates are on the low side, based on what she's hearing from growers, and expects upward adjustments when the USDA updates its report later this month.
"One of the reasons why there's so much wheat this year is that fewer acres were cut for silage because the dairies are in difficult shape and growers weren't sure whether the dairies would be able to buy the green chop, the silage. So a higher percentage of planted acres was grown to grain," she said.
The huge supplies of wheat in the state, coupled with soaring prices, have deterred some millers from purchasing more wheat, said Mike Bouris, a grower in Riverside County. While plenty of wheat was still being sold last month, he said he's noticed that as the market has gotten stronger in the last two weeks, the mills have stopped accepting wheat and are taking a wait-and-see approach.
"The outlook for the market remains positive, but it hasn't trickled down to us yet," he said.
Cooper said the current supply issue will sort itself out as the inventory works its way through the system, "but right now, if you drive around, you'll just see mountains of wheat."
And with the recent jump in wheat prices, she said interest in planting wheat has definitely increased- even though some growers may be limited in what they can grow based on their own individual circumstances.
She noted that lack of irrigation water allotments led to a 30 percent to 40 percent drop in wheat acreage in the Klamath Basin this year. Although wheat production in the San Joaquin Valley has been good, she said water uncertainties continue to plague growers in the region, possibly preventing them from increasing acreage.
Bouris said in his Southern California region, where farmers use dryland-farming techniques to grow wheat, weather is a bigger factor than the market in driving planting decisions.
"It's not like there's any other choice of something else to plant," he said. "If we have some rain, everybody is going to be planting, so the price will not affect what's getting planted down here next year."
For Tom Stirewalt, a grower in San Benito County, the high cost of seed has been a big deterrent, and he did not plant any wheat this spring because of it.
He said stripe rust and other disease problems can devastate production in his region and many California growers rely on new seed varieties that offer resistance to these diseases. Until recently, the sluggish grain market did not justify buying the expensive seeds or planting the crop, he said.
But he said he is "looking forward" to planting wheat in the fall now that prices are rebounding.
Paul Sanguinetti, a grower in San Joaquin County who uses some irrigation to grow his crop, said wheat is largely a rotational crop, so the price of wheat will have less to do with how much he will grow and more to do with the amount of acres he plans to devote to the crops that follow wheat.
But current wheat prices are persuading him to start pre-selling tonnage for next year, most likely about two-thirds of his crop, he said.
As a wheat handler in Kings County, Jim Crisp, who also chairs the California Farm Bureau Federation commodity advisory committee for wheat, said the higher prices also benefit him because it usually means there's more wheat for him to buy. But he also said he thinks current prices are overblown and unsubstantiated.
"There are still ample supplies in the U.S.," he said. "We have over 1 billion bushels of carryover, and now we've got too much premium built into it. I don't think you can fundamentally support it in this world economy."
He said since the recent price surge is being driven by speculation and concerns about future crop production, the market could change very quickly. He noted that a new crop of wheat is harvested in the world every four months, and higher prices tend to attract more acres, allowing for more supply to meet demand.
While wheat producers may be benefiting from the higher prices, Hunn said livestock producers will be put at a disadvantage because the price of feed will be higher too. He said if wheat and corn prices go up, livestock producers will start feeding more alfalfa, putting more demand on that crop and hence driving up the price of alfalfa.
"The end user is probably not liking these high prices," he said. "For somebody to win, somebody has got to lose, and it seems like right now the farmers are mainly on the winning side of it-at least for the moment."
(Ching Lee is an assistant editor of Ag Alert. She may be contacted at clee@cfbf.com.)
