USDA Wheat Baseline, 2008-17
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). 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 analysis underlying the wheat projections for 2008-17. Details about projections for the U.S. macroeconomy, other U.S. crops, U.S. livestock, farm income and food prices, and U.S. and global agricultural trade, which are critical components of this analysis, can be found in the Agricultural Baseline Projections briefing room.
The discussion is divided into five sections:
The U.S. wheat sector faces challenges to its long-term competitiveness. Planted area in the United States has declined since the 1980s as wheat has lost its competitiveness relative to other U.S. crops, particularly soybeans and corn. The long-term outlook for U.S. wheat points to a slightly smaller planted area, rather than expansion. The recent decline in domestic food use of wheat arising from changing consumer preferences and improved bread preservation technology appears to have ended. In addition to traditional global competitors (Canada, Argentina, Australia, and the European Union), Ukraine and Russia have emerged as new competitors with the United States in foreign markets in years when their production is high. The overall result in the projections is a slightly smaller share of future world trade for the U.S. wheat sector.
Supply Considerations
Several long-term factors, including domestic competition among crops for planted area and global competition in export markets, play important roles in determining the size of the U.S. wheat crop during 2008-17. Despite these influences, the United States remains a major wheat-producing country, with output exceeded only by China, the European Union (EU-27), and India. In the United States, wheat ranks third among field crops in both planted acreage and value of production, behind corn and soybeans.
U.S. wheat planted area maintains downward trends. U.S. wheat-harvested area has varied widely during the past half-century, peaking in the early 1980s. Wheat area dropped off sharply in the late 1980s, primarily due to relatively large
Acreage Reduction Program (ARP) levels when Government-owned stocks were very large. By 1987-88, nearly 30 percent of the national wheat base acreage had been idled by farmers participating in this voluntary program so as to be eligible for commodity
nonrecourse loans and
deficiency payments. Wheat area recovered in the mid-1990s as stocks declined and prices rose, thus lessening the need for ARPs. ARPs were eliminated under 1996 Farm Act starting with the 1996 crop.
Enhanced planting flexibility in the 1996 and
2002 Farm Acts renewed downward pressure on U.S. wheat acreage. Planted area in the United States is down by about 30 percent from an average of 85 million acres in the early 1980s to an average of 60 million acres in recent years. Wheat's share of U.S. field-crop receipts has fallen from about 20 percent in the early 1980s to about 10 percent in recent years.
Wheat land switched to other uses. Wheat area has dropped off in the United States as farmers have taken their land out of production or switched to alternative crops offering higher returns. Enrollment in the
Conservation Reserve Program (CRP) is concentrated in those regions where wheat production predominates. About 60 percent of the land enrolled in the CRP is located in the Plains States, stretching from Texas to North Dakota and Montana. USDA estimates that about 9 million acres of CRP land had been planted to wheat or in a wheat-fallow rotation prior to enrollment. In addition, the introduction of full planting flexibility in the 1996 Farm Act has enabled farmers to switch to alternative crops or to idle their land.
Ethanol expansion in the United States. A large expansion in ethanol production is underway in the United States, which is affecting virtually every aspect of the field crops sector, ranging from domestic crop utilization and exports to prices and the allocation of acreage among crops. Many aspects of the livestock sector are affected too, including the substitution of ethanol byproduct feedstuffs for corn and other feeds in rations. Cellulosic sources of feedstocks for ethanol production hold some promise for the future, but the primary feedstock in the United States is currently corn. Market adjustments to this increased demand extend well beyond the corn industry to supply and demand for other crops, such as wheat. Adjustments in the agricultural sector are already underway and will continue for many years as interest grows in renewable sources of energy.
More intensive use of cropland on the Plains. In the traditional wheat growing areas of the Plains States, there is a more-than-20-year trend to reduce area fallowed by planting alternative crops and lengthening crop rotations. For example, in western Kansas, the historical wheat/fallow rotation has been most commonly replaced by a rotation of wheat/grain sorghum/fallow in which wheat is planted 1 year out of 3 instead of 1 year out of 2. Though cropping intensity increases, wheat is not favored.
Wheat's share of planted area on Plains has also declined. The trend of planting more corn and soybeans on acreage traditionally planted to wheat can be illustrated by examining data for Kansas and North Dakota, two of the country's largest wheat-producing States. In the early 1980s, wheat accounted for 80-90 percent of the total wheat, corn, and soybeans planted in Kansas and North Dakota. In recent years, wheat's share has dropped to 60-62 percent of the total.
Genetic gains for competing crops on the Plains. Loss of wheat acreage to row crops, such as corn and soybeans, on the Plains reflects strong genetic improvements in those crops. New varieties of corn and soybeans can be planted farther west and north in areas with drier conditions or shorter growing seasons. Plus, weed control is far easier with the development of herbicide-resistant varieties (see the Agricultural Biotechnology briefing room for more information).
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 has been slower because of genetic complexity and because of lower potential returns to commercial seed companies, factors that discourage investment in research. For instance, farmers are accustomed to buying seed corn each year because the second generation of hybrid varieties cannot be used for seed. This creates a large annual market for seed companies. In contrast, many wheat farmers, particularly in the Plains States, use saved seed from the previous year's crop instead of buying from dealers every year. This practice sharply reduces the potential market for branded commercial seed wheat.
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.
Demand Considerations
Just as U.S. wheat production faces pressures from multiple factors, changing domestic and international markets will alter demand for U.S. wheat. Several factors underlie the long-term developments that will determine the domestic and foreign demand for U.S. wheat during 2008-17.
Decline in per capita flour use slows. Per capita wheat flour use for calendar year 2006 is estimated at 134.2 pounds, up 0.3 pounds from a year earlier, but down 12.1 pounds from the recent high in 2000. Until the late 1990s, U.S. wheat producers could count on rising per capita food use of wheat to expand the domestic market for their crop. The strength of this domestic market developed out of the historic turnaround in U.S. per capita wheat use that occurred in the early 1970s.
For nearly 100 years, per capita wheat use had declined in the United States, as strenuous physical labor became less common and diets diversified. Wheat use dropped from over 225 pounds per person in 1879 to a low of 110 pounds in 1972. By 1996, use had rebounded to 146.8 pounds per capita. The overall growth in per capita use that occurred between 1973 and 1997 reflected changes that included 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.
This growth appears to have ended in 1997 due to changing consumer preferences, including more weight-conscious people following diets that include fewer carbohydrates. Consumer interest in these diets apparently spiked in 2000 and has since declined; however, the sharp drop in per capita flour use that began in 2000 has slowed. Notably, per capita durum flour use increased in 2005 and 2006 rising to 12.2 pounds from a low of 10.5 pounds in 2004.
Feed use varies. Feed use of wheat varies with price and crop quality. Feeding wheat to livestock increases when the price premium between wheat and corn is narrow, which typically occurs in the summer after winter wheat is harvested but before corn is harvested. Wheat feeding also increases when wheat quality is impaired in some way, reducing its price relative to corn. For example, when there is excessive rainfall at harvest time, some wheat varieties are susceptible to preharvest sprouting. When sprouting occurs, biochemical changes in the wheat kernel diminish baking qualities for making food products.
World market evolve. Growing demand for wheat imports is concentrated in those developing countries where robust income and population growth underpin increases in demand. Such markets include Sub-Saharan Africa, Egypt, Pakistan, Algeria, Indonesia, the Philippines, and Brazil.
Ukraine, Russia, and Kazakhstan have become significant wheat exporters in recent years. Low costs of production and new investment in their agricultural sectors have enabled their world market share to climb to about 20 percent in the last 2 years. However, because of the region's highly variable weather and yields, production and trade are volatile from year to year.
Projections for U.S. Wheat Supply and Use
The long-term projections for U.S. wheat for 2008-17 were heavily influenced by wheat's slow yield gains, declining competitiveness relative to the production of other domestic crops, and increased global competition.
Wheat yields continue slowly rising. Wheat yield is projected at 42.5 bushels per acre for 2008, based on national-level and State-level trend analyses over the past two decades. This is below the 2003 record yield of 44.2 bushels per acre, but above the yields for 2005-07.
Yield growth projected for 2008-17 for wheat, corn, and soybeans reflects differing genetic gains mentioned earlier. Wheat yields are projected to rise by 0.3 bushels per year over the 10-year period. In contrast, corn and soybean yields are projected to rise 2.0 bushels and 0.45 bushels per year, respectively.
Wheat plantings expected to fall with decline in competitiveness. Wheat plantings are projected to rise to 65.0 million acres in 2008 because of a sharp increase in expected net returns (revenue minus variable costs) from 2007, reflecting an increase in the farm price (prices received by producers). Planting incentives reflect expected net returns from the marketplace (expected farm price times projected yield minus variable costs). The projected farm price is above the loan rate for the entire projection period, so loan benefits do not enter into net returns or influence plantings.
Wheat production is expected to expand slightly with rising yields, but supplies are projected to decline. Following the initial spike to 2,350 million bushels for U.S. production in 2008/09, due to sharply expanded plantings, production drops off to a low of 2,100 million by 2012/13. The drop off in planted area during 2009-12 more than offsets slowly rising yields. During 2013-17, wheat planted area declines at a slower annual pace, allowing rising yields to raise production slightly year-to-year for the rest of the projection period. Wheat area declines as wheat farm-price net returns fall, reducing wheat profitability compared to other crops competing for cropland in the United States. As a result, projected U.S. wheat supplies are expected to slowly decline after 2011/12.
Total use of wheat is projected to rise slowly. Total use of U.S. wheat rises only slightly over the projection period. Initially, domestic use rises due to slight increases in food use and feed-and-residual use. Later in the decade, domestic use rises only with the annual increases in food use. Exports are constant at 950 million bushels for the entire period. Thus, only rising food use increases total use from 2011/12 to 2017/18.
Wheat food use increases slowly. Per capita food use of wheat in the United States has fallen sharply in recent years, but this decline is projected to end in the longer term. Total projected food use is 950 million bushels in 2008/09, which then rises 9 million bushels annually over the projection period. This growth in total food use reflects assumptions of:
- a slowing of annual population growth from 0.93 percent to 0.84 percent,
- a constant per capita use, and
- a flour extraction rate of 74.63 percent, the long-term average from 1989-2006.
Feed and residual use is driven mainly by feed grain prices and wheat supply. Growth in domestic use also reflects wheat fed to livestock. However, this component of wheat use is volatile, with year-to-year changes stemming from the availability of lower quality wheat. Demand for wheat as a 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.
With larger production, rising ending stocks, and falling prices, feed-and-residual use of wheat rises in the initial years of the projections from recent low levels. After 2011/12, annual wheat feeding levels off at 215 million bushels as projected supplies and prices level off. Wheat prices are held high during the next decade by high corn prices. Corn prices are at relatively high levels in the projections, in part, because of the ethanol demand. Ethanol production is assumed to expand sharply through 2009/10 and then expand slowly through the remainder of the period.
Projections for World Wheat Trade
The USDA baseline also provides projections for global trends in wheat supply, use, and trade. See below for the discussion on wheat from the Global Agricultural Trade chapter of the Agricultural Baseline Projections briefing room.
World wheat trade (including flour) expands by more than 26 million tons (23 percent) between 2008 and 2017 to 137 million tons. Important import projections include:
- Egypt maintains its position as the world's biggest importer of wheat, as imports climb slowly to nearly 9 million tons. Imports by Brazil, another large importer, are projected to exceed 8 million tons. Brazil's climate generally does not favor wheat, and in some key Brazilian wheat-producing states, winter corn is expected to have better returns than wheat.
- Imports by developing countries in Sub-Saharan Africa, North Africa, and the Middle East rise nearly 12 million tons and account for 45 percent of the total increase in world wheat trade. In most developing countries, little change in per capita wheat consumption is expected but imports expand modestly because of population growth and limited potential to expand production.
- Changing consumption patterns will boost wheat imports by some major importing countries. In Indonesia, strong economic growth and diversification of diets are projected to increase per capita wheat consumption. Mexican consumers are projected to continue substituting wheat for corn in their diets.
- Lower wheat-to-corn price ratios during most of the projection period enable wheat to compete effectively with corn for feed use in a number of countries. Europe is expected to continue to account for the largest share of global wheat feeding.
- China has been a small net exporter of wheat in recent years, but production constraints cause it to become a small net importer towards the end of the projections.
The top five wheat-exporting nations (the United States, Australia, the EU, Argentina, and Canada) account for 70 percent of world trade in 2008-17. This is down from 89 percent in 1997/98, mostly due to increased exports from the Black Sea area. U.S. wheat exports are projected to account for less than 19 percent of global wheat trade, down from 25 percent in the past 5 years. Despite a significant rebound in global production, low stocks and relatively high prices are projected to persist for most of the projection period.
- Shares of the world wheat market held by Canada and the United States decline slightly, offsetting increases by the EU, Ukraine, Russia, Australia, and Argentina.
- In Canada, increased demand for vegetable oils, especially rapeseed oil for biodiesel production, and increasing demand for barley are expected to reduce wheat area, and restrict any growth in exports.
- Exports from Ukraine and Russia are projected to continue gaining market share, more than offsetting a slight decline in the share held by Kazakhstan. However, because of the region’s weather extremes, high year-to-year volatility in production and trade can be expected. Also, continued real appreciation of these countries’ currencies, caused mainly by strong foreign exchange earnings and domestic inflation, could moderate the rise in exports.
- Wheat exports by Turkey and other smaller exporters change little or trend slowly downward during the projection period. Although India has exported some wheat in recent years, exports are expected to be minimal and imports to increase as domestic demand outpaces production and stocks remain relatively low.
Despite Current High Prices, Market Forces Constrain Growth in U.S. Wheat Sector
The U.S. wheat sector is facing long-term challenges as productivity gains and returns for competing field crops outpace those for wheat. During the next decade, wheat-yield improvements are expected to continue lagging behind those for competing row crops. Low relative wheat prices are due, in large part, to continued foreign competition, from both traditional wheat-exporting countries and some newcomers. Furthermore, domestic food use, while growing, no longer provides the dynamic market growth experienced in the 1970s through the mid-1990s. Consequently, farmers will focus on other crops, such as corn and soybeans, because of low returns to wheat relative to these other crops. U.S. wheat planted area is projected to fall over the next 10 years.
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