USDA Wheat Baseline, 2005-14
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 a result
of changing consumer preferences and improved bread preservation
technology. Ukraine and Russia are competitive with the United States
in foreign markets in years when their production is high. The effects
of these and other changes on the U.S. wheat sector were evaluated
in the preparation of USDA's 10-year 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 2005-14. 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 long-term factors are important for determining the
size of the U.S. wheat crop during 2005-14.
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. 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. About one-fourth
of CRP acres in the baseline is land that has historically been
planted to wheat.
Rotations are changing. Changes in rotations, particularly
in the dryland areas of the Great Plains, 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 years 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 incidence 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 Great Plains 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 improvement for wheat is slower because
of 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 every year. However, many wheat farmers,
particularly in the Plains States, plant seed saved from the previous
harvest instead of buying from dealers.
Demand
Several factors underlie the long-term developments that will determine
the domestic and foreign demand for U.S. wheat during 2005-14.
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 flour 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. U.S. per capita wheat
consumption declined for nearly 100 years 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 1997, consumption had rebounded to 147 pounds per capita.
Since 1997, growth in per capita food use appears to have ended.
Notably, per capita flour consumption has dropped sharply to 133
pounds in 2004. These changes may reflect, in part, the increasing
numbers of health- and weight-conscious people 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 produce enough bread to
meet 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. Russia's
2002/03 exports reflected nearly ideal weather and prevailing high
prices. Production in Russia and Ukraine is unstable year to year
because of variable weather conditions.
The Black Sea area is emerging from the economic adjustments experienced
during its transition to independence following the breakup of 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 were made, especially port facilities, by countries
in the Black Sea region to enhance their future trade competitiveness.
Baseline Projections for U.S. Wheat Supply and Use
Highlighted here are key findings for U.S.
wheat from the baseline analysis for 2005-14.
Wheat yields continue slowly rising. The starting wheat
yield in the projections is 42.3 bushels per acre for 2005/06, based
on 1985-2004 trend estimation. This is below the 2003/04 record
yield of 44.2 bushels per acre and the 2004/05 yield of 43.2 bushels.
Yield growth projected in the baseline for wheat, corn, and soybeans
reflects differing genetic gains. Wheat yields are projected to
rise on average by 0.9 percent, or 0.4 bushels, per year over the
projection period (based on 1985-2004 trend analysis). In contrast,
corn and soybean yields are projected to rise 1.2 percent and 1.0
percent per year, respectively.
Projected wheat planted area varies with relative profitability.
Wheat plantings drop to 58.5 million acres in 2006/07 and 2007/08,
a result of a sharp drop in expected net returns (revenue minus
variable costs) from 2004/05, reflecting a decline in the farm price
(prices received by producers).
Export driven use eventually outpaces production gains.
With rising wheat area and yields, U.S. production rises. Projected
wheat supplies initially expand faster than use, raising ending
stocks. Ending stocks begin to fall after 2006/07, as export-driven
total use continues to outpace production over the remainder of
the projections period.
The U.S. share of world trade drops to a low of 22.3 percent in 2005/06.
The average U.S. share over the previous 5 years was 25.8 percent.
As U.S. exports begin to rise in the baseline, the U.S. market share
rises to 26 percent in 2014/15.
Rate of decline in per capita food use expected to slow.
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 is 920 million bushels
in 2005/06, which then slowly rises 5 million bushels annually.
This growth in total food use reflects:
- a 0.9-1.0 percent decline in annual population growth,
- a slowing of the decline in per capita consumption from 0.5
percent annually to 0.3 percent by the end of the projection
period, and
- a flour extraction rate of 74.6 percent, the long-term average
for 1989-2003.
Feed and residual use is driven by wheat supply. Total growth
in the domestic market also reflects wheat fed to livestock. However,
this component of wheat use is volatile, with year-to-year changes
stemming mainly from the availability of lower quality wheat. Demand
for wheat as feed depends upon supplies of wheat, the price of wheat
relative to prices for corn and other feed grains, and the number
of livestock being fed.
The feed-and-residual use estimate also includes a residual component
that accounts for errors made in estimating other supply and use
variables. Feed and residual use in the baseline rises slowly from
200 million bushels in 2005/06 to 230 million bushels by the end
of the projection period, primarily reflecting increases in the
total supply of wheat.
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. From 2006/07
to the end of the projections period, rising exports drive gains
in total U.S. wheat use.
Farm price and stocks-to-use ratio. The decline in the projected
U.S. farm price occurs because of a rise in the stocks-to-use ratio
(ending stocks divided by the sum of domestic use and exports) from
2003/04, as U.S. wheat exports faced increasing competition. This
relatively poor export performance at the start of the projection
period drops the projected U.S. farm price to nearly the level of
the loan rate in 2005/06.
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 to $3.00 per bushel in 2005/06 before
rising back to $3.60 per bushel by 2014/15. 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. When prices are low enough for marketing
loan benefits, acres stay flat. Rising farm-price net returns due
to rising farm prices and yields eventually raise projected planted
area to 61.5 million acres in 2014/15, a level still below the 62.1
million acres in 2003/04. The projected harvested area throughout
the baseline period is based on a 10-year, average harvested-to-planted
ratio of 85 percent.
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 2005-14 baseline, China is expected to be the world's largest
importer, but most of the growth in world trade is expected in developing
countries with limited production potential. Their purchases will
boost projected global wheat imports to 129 million metric tons
by 2014/15.
Population growth drives imports by developing countries.
Population growth is the main demand driver in most developing countries.
Wheat imports are expected to grow slowly in Egypt, reaching 8 million
metric tons, and matching China by 2014/15, because per capita consumption
levels are already very high. By 2014/15, Brazil is expected to
import nearly as much as China and Egypt. Brazil's climate does
not favor wheat, and in some key wheat-producing states, winter
corn is expected to have better returns than wheat. China is expected
to maintain wheat imports at 8 million metric tons, as government
policies encourage production and per capita consumption declines.
In Iran, wheat imports are expected to grow slowly from recent low
levels, remaining below 2 million metric tons as production incentives
are assumed to continue.
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, and the United States.
Exports by the European Union (EU) and Eastern Europe will be limited
by policies, including a 10-percent set aside, that attempt to limit
imports and exports to other countries as EU expansion continues.
Canada's wheat area is expected to continue to be limited by higher
returns from other crops. India's wheat exports are expected to
stop by 2008/09 as stocks tighten.
U.S. Wheat Sector's Future Is Not Very Dynamic
The U.S. wheat sector is facing a close balance between long-term
productivity growth and price compared to other crops. Wheat-yield
improvements are expected to continue lagging behind those for competing
row crops. Domestic food use no longer provides the dynamic market
growth experienced in the 1970s through the mid-1990s. U.S. exports
will expand only as long as growth in U.S. supplies outpaces domestic
use. Over the next 10 years, planted area of U.S. wheat is projected
to fluctuate but rise to 61.5 million acres in 2014/15.
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