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MODEST WHEAT RECOVERY AHEAD
Nostalgia for the 1970s is on the rise in U.S. culture. Oddly, many of wheat's supply and demand statistics have reverted to levels from that era as well. But before you grow sideburns and try to squeeze into your old leisure suit, let's review the wheat outlook.

Wheat prices have traded at historically low levels for nearly four years. Farm level prices have held below $3.00 for the longest period in modern history. However, signs are emerging that the wheat market will improve, at least modestly, in the season ahead. If some recent trends are sustained, the recovery could be surprisingly strong.

WORLD SUPPLY AND DEMAND

World wheat production has held steady the past few years, well below 1997's record level, and has not kept pace with demand. As a result, the global wheat stocks-to-use ratio has tightened to near 30-year lows. While low prices suggest the world has become more comfortable with low stock levels, current supplies will provide little cushion from a poor world crop or an unexpected increase in demand.

There have been important shifts in world trade recently. In the past two seasons, several former importing countries/regions have emerged as wheat exporters, including the FSU, Eastern Europe and India - even Pakistan and Turkey are wheat exporters. While production in these new exporting regions is forecast to decline in 2002, they plan to remain export competitors in the world market.

Forecast production in traditional exporting countries, excluding the U.S., is projected to increase 12 percent this year due to a sharp recovery in the EU's production following poor weather and low yields last year. Crop prospects in Canada and Australia are less certain. A return of El Nino, and its associated dryness, threatens Australia's wheat crop. Lower acreage and early season dryness may also limit Canadian production.

Still, the U.S. is expected to face increased export competition from the EU this year. As a result, U.S. wheat exports in 2002-03 are forecast to fall to 900 million bushels, the lowest level in more than 30 years.

THE U.S. SITUATION

U.S. wheat producers have responded to low prices over the past several years by curbing acreage. Wheat planted area is down 16 million acres or 21 percent since 1996 to 59 million acres. Recent poor weather has also hurt yields, which are down sharply again this season in the southern Plains due to dryness. With normal spring wheat yields, all wheat production is forecast at only 1.8 billion bushels, down 7 percent from last year and the smallest crop since 1978.

With supplies tightening, why have prices remained low? The answer centers largely on declining export demand. Exports took another step down last season and are forecast to drop more this year. At only 900 million bushels, exports are projected to fall to the lowest level since the early 1970s.

In addition to export competition, currency relationships have played a role in declining U.S. wheat exports. The dollar strengthened sharply over the last six to seven years, but that trend may be reversing. In the past six months, the dollar index is down 8 percent. A weaker dollar makes U.S. wheat more competitive in the world market and could finally halt the decline in U.S. export demand.

Even with lower exports and flat domestic use in 2002-03, wheat carryover stocks are expected to tighten for the third consecutive year to 550 million bushels or 26 percent of annual use. As a result, the season average price is forecast to increase to about $3.00 per bushel, up 20 to 25 cents from last season and the highest average price in five years. Seasonally, wheat prices should be strong into the late fall and early winter with wheat prices increasing 35 to 40 cents from harvest lows.

Gains will hinge in part on how U.S. spring wheat yields turn out. However, with low expectations for exports, the dollar weakening and relatively tight world supplies, any surprises in the export market are more likely to be positive than negative for prices.

NEW FARM BILL

Under the new farm law, the national average loan rate increases 22 cents per bushel to $2.80 for 2002 and 2003. The loan rate then falls to $2.75 from 2004 to 2007. Unlike the past, USDA has set loan rates by wheat class rather than across the board. In Ohio for example, loan rates are actually lower than before, while loan rates in the Plains are 20 to 30 cents higher per bushel. This higher loan rate should encourage some renewed interest in wheat production, particularly in the northern Plains. Target prices have been reintroduced for purposes of calculating counter cyclical payments. The target price is $3.86 for the 2002 and 2003 crops. AM


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