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TOP MARKETING ISSUES AFFECTING THE WHEAT INDUSTRY
Editorís Note: The U.S. wheat market is in a period of transition. Doane Agricultural Servicesí chief economist lists several factors affecting wheat growers and the wheat market today.

1 DECLINING ACREAGE

Since the 1996 Farm Bill was put in place, wheat acreage has been declining as growers switch to other crops, such as soybeans, sunflowers and dryland corn. Wheat acreage totaled 75 million acres in 1996, the first year of the so-called Freedom to Farm bill. The bill put an end to supply control measures, such as set-asides and the 0-50-85 program. Land that had been idled under the government programs returned to production, and planted acreage in 1996 was the highest since 1990. Since then wheat acreage has plunged. For 2001, wheat acreage will total just over 60 million acres, the lowest level since 1973.

2 INADEQUATE WHEAT PRODUCTION

The effects of plunging acreage have been at least partially offset by very strong wheat yields from 1997 through last year, but this year will be different. USDA recently estimated winter wheat production at 1.364 billion bushels, the smallest crop since 1978. Total wheat production is expected to fall short of 2 billion bushels for the first time in a decade. Yields will be down due to poor growing conditions, and farmers will abandon more acres than usual this year.

3
DISAPPOINTING DEMAND

There is little perceptible growth in demand for U.S. wheat, but use has been very steady. If demand in the 2001-02 crop year is near this average level, wheat carryover stocks would decline by about 400 million bushels. This would represent a drop of almost 50% and bring stocks below the 444 million bushels recorded in 1996-97 - when wheat prices hit record levels.

USDAís first forecast for demand in the 2001-02 crop year is just under 2.3 billion bushels, well below the average of the last five years. The USDA forecast also calls for a 100 million bushel drop in U.S. exports as the combination of stronger U.S. prices and the strong dollar cause a reduction in our market share.

4 TIGHTENING STOCKS

Even with "normal" yields, production from 60 million planted acres will fall short of demand. Over the next few years, market prices have to encourage farmers to boost wheat acreage. This process will probably start this fall when producers seed the winter wheat crop for 2002. But wheat prices arenít high enough to cause an increase in acreage yet.

This suggests rising prices over the summer, once the normal harvest pressure of June and early July has passed. Another year with acreage near current levels would push stocks down to critical levels, even if national average yields recover to a level near 40 bushels per acre. The tightening wheat supplies will support prices, but discourages the use of wheat for livestock feed.

5 LONG-TERM POTENTIAL

The long-term outlook for the wheat market is clouded. World demand for wheat will rise. Most of the growth in world population will be in poor countries, which rely on food grains as the major part of their diets. This suggests rising world demand for wheat, but in recent years, the U.S. share of world wheat trade has been dropping. Twenty years ago, U.S. exports accounted for almost 50% of world wheat trade compared to about 25% today. This suggests that while world demand for wheat may rise substantially, U.S. wheat exports and total demand may be stuck in the mud.

6 WORLD COMPETITION

Wheat is a very versatile and adaptable crop, which can be grown in many parts of the world. In 1996 when wheat prices rose substantially, world wheat area harvested increased by more than 27 million acres, while the increase in the U.S. was less than 2 million acres. Clearly, U.S. farmers will face stiff competition for any growth in world wheat demand. Even so, some recovery in U.S. wheat acreage is likely in both the short term, and over the next several years. AM

Rich Pottorff is chief economist with Doane Agricultural Services Co., St. Louis.


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