USDA Wheat Baseline, 2004-13
The U.S. wheat sector is facing challenges to its long-term
profitability. Planted area in the United States has dropped
as wheat loses its competitiveness to other U.S. crops,
particularly soybeans and corn. Domestic food use of wheat
has declined in recent years as consumer preferences change
and bread-preservation technology improves. In years when
their production is large, Ukraine and Russia are competitive
with the United States in foreign markets. The effects
of these and other changes on the U.S. wheat sector were
evaluated in preparation of USDA's baseline projections.
Each year, USDA updates its 10-year projections of supply and utilization
for major field crops grown in the United States, including wheat (see Overview
of the USDA Baseline Process for more information). The commodity projections
are used to forecast farm program costs and to prepare the President's
budget. One key use of the projections is as a "baseline" from
which to analyze the impacts of potential policy changes affecting U.S.
agriculture. This discussion summarizes the analysis underlying the wheat
baseline projections
for 2004-13. Details about the baseline projections for the U.S. macroeconomy,
other U.S. crops, U.S. livestock, the U.S. agricultural sector, and global
agricultural trade can be found in the Agricultural
Baseline briefing room.
Supply
Several factors underlie the long-term trends that will
determine the size of the U.S. wheat crop during 2004-13.
U.S. wheat planted area trending downward. Planted
wheat area in the United States has trended down since
its peak of 88 million acres in 1981, in part because
of lower returns relative to other crops. Increased planting
flexibility under the 1996 Farm Act facilitated expansion
of soybeans and corn into traditional wheat areas, especially
the Plains States. Under the 1996 Act, soybeans emerged
with some additional program incentives: soybean loan
rates provided more revenue protection for soybeans than
for other crops when commodity prices went down in the
late 1990s. In addition, more wheat land was planted to
minor oilseeds, such as canola. Finally, USDA's Conservation
Reserve Program (CRP) removed 8 to 10 million of acres
of land from production that had traditionally been planted
to wheat.
Rotations are changing. Changes in rotations,
particularly in the dryland areas of the Plains States,
have also contributed to the decline in wheat acres. For
example, in Kansas, a typical wheat-fallow rotation has
been replaced most commonly by a rotation of wheat-grain
sorghum-fallow, so that wheat is planted 1 year out of
3 instead of 1 out of 2. Other crops, such as soybeans
and corn, are also used in rotations. Studies from Kansas
State University indicate that multicrop rotations produce
markedly higher net returns than a wheat-fallow rotation,
primarily because of the inclusion of higher value, but
riskier, crops in the rotation mix.
Wheat disease also a factor. Concerns about wheat
disease problems in the Northern Plains, particularly
scab (head blight) in North Dakota and Minnesota (caused
by the fungus Fusarium graminearum), influenced
planting decisions in the 1990s and will do so in the
future. The increased disease incidences may stem in part
from switches to corn plantings and minimum tillage in
traditional wheat areas in the Northern Plains. Both activities
provide hosts for disease organisms.
Wheat's genetic improvement lags competing crops.
Loss of wheat acreage to row crops in the Plains States
reflects genetic improvements in corn and soybeans, producing
varieties that can be planted farther west and north in
the region, areas with drier conditions or shorter growing
seasons. The pace of genetic improvement has been slower
for wheat than for some other field crops, resulting in
little growth in wheat yields, which makes wheat a less
attractive option for farmers. Genetic improvements have
been slower in wheat because of the plant's genetic complexity
and because of lower potential returns to commercial seed
companies, factors which discourage investment in research.
In the corn sector, for example, where hybrids are used,
farmers buy seed from dealers annually. However, many
wheat farmers, particularly in the Plains States, use
seed saved from the previous harvest instead of buying
from dealers every year.
Demand
Several factors underlie the long-term trends that will
determine domestic and foreign demand for U.S. wheat during
2004-13.
U.S. per capita food use appears to have peaked.
Until recently, U.S. wheat producers could count on rising
per capita food use of wheat to expand domestic demand
for their crop. The strength of this domestic market developed
out of the historic turnaround in U.S. per capita wheat
consumption in the 1970s. For nearly 100 years, U.S. per
capita wheat consumption declined as caloric requirements
decreased because physical labor became less common and
diets diversified. Wheat consumption dropped from over
225 pounds per person in 1879 to a low of 110 pounds in
1972.
Between 1973 and 1997, the growth in per capita consumption
reflected the boom in away-from-home eating, the desire
of consumers for greater variety and more convenience
in food products, promotion of wheat flour and pasta products
by industry organizations, and wider recognition of health
benefits stemming from eating high-fiber, grain-based
foods. By 1996, consumption had rebounded to 147 pounds
per capita.
Since 1996, growth in per capita food use appears to
have ended. Notably, per capita flour consumption dropped
about 5 pounds in both 2001 and 2002 to 137 pounds. The
decline slowed in 2003, resulting in a loss of 1 more
pound to 136. These changes may reflect, in part, the
increasing numbers of weight-conscious consumers following
diets that include fewer carbohydrates.
Bread preservation is improving. Another force
reducing flour usage is the expanding production of extended
shelf life (ESL) bread. New ESL technologies can double
or even triple the shelf life of a fresh loaf, from several
days to 10 or more. The outcome for U.S. bakers is a reduction
in "stales" (meaning bread that does not sell
and is taken back by the baker) from as high as 15 percent
of sales to less than 8 percent. Reducing stales directly
reduces the quantity of flour required to supply the same
level of consumer demand.
Exports from Black Sea area have been increasing.
Russia and Ukraine have emerged as significant exporters
of wheat in recent years. In the 1992/93 crop year (July-June),
the two countries exported 33 and 4 million bushels of
wheat, respectively. By 2002/03, exports had reached 464
and 243 million bushels, respectively. The 464 million
bushels Russia exported in 2002/03 reflects nearly ideal
weather and, in part, the drought-reduced yields experienced
by traditional major exporters (Canada, the United States,
and Australia). Production in Russia and Ukraine is unpredictable,
however, because of highly variable weather conditions
from year to year.
The Black Sea area is emerging from the economic adjustments
experienced during its transition to independence from
the Soviet Union. One reason Russia has been able to export
so much wheat is that its livestock sector has been reduced
sharply, cutting the domestic demand for wheat feeding.
In addition, investments in infrastructure, especially
port facilities, were made to enable the countries in
the Black Sea region to be serious trade competitors in
the future.
Baseline Projections for U.S. Wheat Supply and Use
Highlighted here are key findings for U.S.
wheat from the baseline analysis for 2004-13.
Wheat yields rise slowly. Yield growth projected in the
baseline for wheat, corn, and soybeans reflects differing
genetic gains. Wheat yields are projected to rise on average
by 0.35 bushels per year (0.8 percent) over the projection
period. In contrast, corn and soybean yields are projected
to rise 1.8 bushels (1.2 percent) and 0.4 bushels (1 percent)
per year, respectively. Thus, in the baseline, slower
wheat yield gains will limit the future profitability
of wheat relative to these competing crops, especially
corn.
The starting wheat yield in the projections is 41.7 bushels
per acre, based on 1985-2003 trend estimation. This is
below the 2003/04 record yield of 44.2 bushels per acre.
Projected planted area declines. After an initial
increase in wheat plantings, planted area in subsequent
years is lower, reflecting each year's expected net returns
relative to competing crops. About one-fourth of Conservation
Reserve Program acres in the baseline are in areas that
have historically been planted to wheat.
Projected planted area drops to 60.5 million acres in
2005/06, then down to 60 million acres for 2007/08 through
2013/14. The decline in 2005/06 is the result of a drop
in the net returns (revenue minus variable costs) from
2003/04 to 2004/05, reflecting a decline in the farm price
(prices received by producers) from 2003/04 to 2004/05.
The sharp decline in the projected farm price occurs
because of a rise in the stocks-to-use ratio (ending stocks
divided by the sum of domestic use and exports) as exports
drop sharply from 2003/04 to 2004/05 as the Black Sea
area and European Union (EU) production recovers with
normal weather. This relatively poor export performance
at the start of the projection period drops the projected
U.S. farm price below the loan rate in 2006/07 and 2007/08.
Production incentive falls to government-support
level. Planting incentives reflect expected net returns
from the marketplace (expected farm price times projected
yield minus variable costs), augmented by marketing loan
benefits when prices are low. Projected prices in the
baseline fall below the loan rate in 2006/07 and 2007/08
before rising back to $3.00 per bushel by 2013. Because
of the seasonality of wheat prices, farmers benefit from
the marketing
loan program when seasonal lows fall below the posted
county price for wheat. These marketing loan benefits
continue through the full projection period, keeping net
returns relatively flat and holding wheat plantings at
60 million acres for most of the baseline.
The ratio of planted area to harvested area for the 2004
wheat harvest is projected to be 0.84 because of low subsoil
moisture in the Plains States. The ratio for subsequent
years is the average of the most recent 10 years of 0.85.
EU and Black Sea area exports recover. Winter
kill reduces Russia and Ukraine projected exports in 2003/04
to 129 million and 4 million bushels, respectively. This
decline, combined with drought-reduced exports from the
EU, provides an opportunity for the United States to sharply
increase its exports in 2003/04. In the baseline projections,
average weather is assumed and the Black Sea area and
EU exporters are expected to reclaim a portion of the
markets lost in 2003/04 to the United States.
Rising exports eventually outpace production gains.
The impact of trade on U.S. stocks shapes the pattern
of U.S. wheat supply. With stable wheat area, production
rises only with slowly advancing yields. With increasing
world trade, U.S. exports begin to increase by 2007/08.
Export gains eventually overtake production gains, ending
the rise in beginning stocks by 2009/10. Beginning stocks
then drift slightly lower, as exports continue to outpace
production over the remainder of the projections period.
The U.S. share of world trade drops from 30 percent in
2003/04 to a low of 22.5 percent in 2007/08. As U.S. exports
begin to rise, the United States gains back a little market
share during the remainder of the baseline period.
Per capita food use continues to decline. Per
capita food use of wheat in the United States has fallen
sharply in recent years, but the rate of decline is expected
to slow in the longer term. Total projected food use decreases
to a low of 905 million bushels in 2004/05, and then slowly
rises 2-3 million bushels annually. This slow growth of
total food use is slightly less than the growth rate of
the U.S. population, thus per capita use slowly declines
over the period at 0.6 percent annually.
Wheat and corn prices drive feed-and-residual use.
Total growth in the domestic market is not just a function
of the projected slow rise in total food use. Wheat is
also fed to livestock, but this component of wheat use
is volatile, with year-to-year changes stemming mainly
from the availability of substantial quantities of lower
quality wheat. Demand for wheat as feed depends largely
on the price of wheat relative to prices for corn and
other feed grains.
In the baseline projections, feed-and-residual use—which
includes both feed use and a residual that accounts for
errors made in estimating other variables—peaks
in 2007/08 and then drifts slowly downward for the remainder
of the period. This pattern of feed-and-residual use reflects
the projected changes in the farm price of wheat and the
wheat/corn price ratio brought about by projected export
changes. Feed use mirrors projected exports; as exports
drop, the farm price drops, which leads to more feeding.
The reverse is also true when rising exports boost the
farm price.
Total use of wheat rises steadily.
In the baseline projections, total use of U.S. wheat rises
steadily after the early drop in exports. Initially, domestic
use rises due primarily to increased feed-and-residual
use, leading to gains in the total use of wheat. Then,
rising exports, and the associated higher prices, reduce
feed-and-residual use. From 2007/08 to the end of the
projections period, rising exports lead to gains in total
U.S. wheat use.
Baseline Projections for World Wheat Trade
The USDA baseline also provides projections for global
trends in wheat supply, use, and trade.
World wheat trade peaked in 1987/88 at 114 million metric
tons, when both China and the Soviet Union were importing
very large quantities of wheat. Imports by Eastern Europe,
the former Soviet Union, and China have been much lower
since then. Moreover, world wheat trade has not matched
record levels despite significant growth in imports by
developing countries since the late 1980s. Over the course
of the 2004-13 baseline, China is expected to join many
developing countries in boosting wheat imports, bringing
projected global imports to over 125 million metric tons
by 2013/14.
Population growth drives imports by developing countries.
Population growth is the main demand driver in most developing
countries. By 2013/14, Brazil is expected to be the world's
largest wheat importer, taking over 9 million metric tons.
The climate in Brazil does not favor wheat, and in some
key wheat-producing states, winter corn is expected to
have better returns than wheat. Wheat imports are expected
to grow more slowly in Egypt, reaching more than 8 million
metric tons by 2013/14, because per-capita consumption
levels are already very high. China is expected to gradually
increase wheat imports to over 5 million metric tons,
as higher returns for other crops and increasingly expensive
irrigation in the North China Plain limit wheat production.
However, in Iran wheat imports are expected to remain
below 3 million metric tons as consumption subsidies remain
limited. Most developing countries are expected to modestly
expand wheat imports, based on population growth, little
change in per capita consumption, and limited production
potential.
World wheat trade is projected down significantly in
2003/04 because of smaller supplies of lower quality
wheat and reduced trade of wheat for feeding. In future
years, the supply of lower quality milling wheat is
expected to rebound, boosting global trade. The baseline
assumes average yields, so the availability of wheat
for export from Russia and Ukraine is expected to be
intermediate between the huge exports of 2002/03 and
the net imports expected in 2003/04. India's wheat exports
are also expected to be modest, about 2 million metric
tons per year.
Trade growth goes mostly to traditional exporters.
Most of the growth in world wheat trade is expected to
be captured by traditional exporters, Australia, Argentina,
Canada, and the United States. Exports by the EU and Eastern
Europe will be limited by policies that attempt to limit
imports and exports to other countries as the EU expands.
U.S. Wheat Sector's Future Is Not Very Dynamic
The U.S. wheat sector is facing long-term productivity
and price challenges. Wheat-yield improvements are expected
to continue lagging behind those for competing row crops.
Low wheat prices are due, in large part, to continued
foreign competition, from both traditional wheat-exporting
countries and some newcomers. Furthermore, domestic food
use no longer provides the dynamic market growth experienced
in the 1970s through the mid-1990s. Consequently, other
crops will continue competing with wheat for production
resources, including land, because of low returns to wheat
relative to these other crops. U.S. wheat planted area
is projected to be nearly constant over the next 10 years.
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