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Wheat: Market Outlook

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USDA Wheat Baseline, 2009-18

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 2009-18. 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 the competitiveness of wheat has declined relative to other U.S. crops, particularly soybeans and corn. The long-term outlook for U.S. wheat points to a relatively stable planted area compared to the past 5 years. The sharp decline in domestic food use of wheat since 2000—arising from changing consumer preferences—appears to have ended. Internationally, 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 U.S. share of an expanding world wheat trade.

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 2009-18. 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 has trended down for many years. U.S. wheat 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 in order 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.

Wheat area and yield

The introduction of full planting flexibility in the 1996 Farm ActPDF file enabled farmers to switch to alternative crops or to idle their land. Planting flexibility increased competition for area among corn, oilseeds, and wheat, which put downward pressure on U.S. wheat acreage. Planted wheat 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 59.6 million acres over the past 5 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 8 million acres of CRP land had been planted to wheat or in a wheat-fallow rotation prior to enrollment.

In the traditional wheat growing areas of the Plains 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.

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 57-62 percent of the total.

Wheat plantings area as share of planted area of wheat corn and soybeans in Kansas and North Dakota

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 alternative 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 seed saved from a hybrid cannot be used for a subsequent crop. 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 and, thus, seed development research.

Indices of North Dakota crop yields (3-year averages)

Wheat disease also a factor. Concerns about wheat disease problems in the Northern Plains, particularly scab (head blight) in North Dakota and Minnesota, influenced planting decisions starting in the 1990s and will do so in the future. The increased incidence of this disease may stem in part from larger corn plantings and reduced tillage practices in traditional wheat areas in the Northern Plains. Both activities provide hosts for disease organisms.

Ethanol expansion in the United States. A large expansion in ethanol production has taken place in the United States, which has affected 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.

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 2009-18.

Decline in per capita flour use slows. Domestic per capita wheat flour use for calendar year 2007 is estimated at 137.9 pounds, up 2.3 pounds from a year earlier, but down 8.4 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.

U.S. per capita wheat flour use, 1964-2008

For nearly 100 years, per capita wheat use had declined in the United States, as strenuous physical labor became less common and diets more 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. The sharp drop in per capita flour use that began in 2000 seems to have ended.

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 evolves. Growing global 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. However, because of the region's highly variable weather and yields, production and trade are volatile from year to year. Their share of world exports over the past 4 years has ranged from 10 to 20 percent.

Projections for U.S. Wheat Supply and Use

The long-term projections for U.S. wheatExcel file for 2009-18 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 43.0 bushels per acre for 2009, based on national-level trend analysis since 1985. This is below the record-high 2008 yield of 44.9 bushels per acre.

Yield growth projected for 2009-18 for wheat, corn, and soybeans reflects differing genetic gains as 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 be relatively stable over the next decade. Wheat plantings are projected to rise to 61.0 million acres in 2011 because of 1) additional land becoming available from expiring CRP contracts and 2) incentives provided by high expected net returns (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. Plantings are expected to fall off slightly toward the end of the decade as land is switched away from wheat to more profitable crops.

U.S.planted area and net returns

Wheat production is expected to expand slightly with rising yields, raising projected supplies. Projected production rises during the early years of the 2009-18 period with more planted acres and rising yields. Production falls slightly as planted area drops, then resumes growth as yields are projected to continue to improve. Imports of wheat are expected to remain relatively small, but increase slowly, adding to U.S. supplies. The result is that U.S. wheat supplies are projected to increase at an uneven pace over the 10-year projections period.

U.S. wheat supply

Total use of wheat is projected to rise slowly. Total use of U.S. wheat rises slowly over the next decade, with export gains larger than domestic use increases. At the beginning of the period, relatively high wheat-to-corn price ratio limits wheat feeding while the falling wheat price shifts wheat supplies into export channels. Midway through the 10-year period, the expansion of exports and the decline in feed and residual use level off and only domestic food use increases.

U.S. wheat utilization

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 965 million bushels in 2009/10, which then rises 9 million bushels annually over the projection period. This growth in total food use reflects assumptions of 1) slowing annual population growth from 0.93 percent to 0.84 percent, 2) constant per capita use, and 3) a long-term average flour extraction rate.

Projections for World Wheat Trade

The USDA baseline also provides projections for global trends in wheat trade. The following discussion on wheat trade from the Global Agricultural Trade chapter of the Agricultural Baseline Projections briefing room.

World Wheat Imports. Growth in wheat imports is concentrated in those developing countries where income and population gains underpin increases in demand. Important growth markets include Sub-Saharan Africa, Egypt, Pakistan, Algeria, Indonesia, the Philippines, and Brazil. World wheat trade (including flour) expands by nearly 22 million metric tons (18 percent) between 2009 and 2018 to 141.6 million metric tons.

  • Egypt maintains its position as the world’s largest importing country, as imports climb slowly to more than 9 million tons. Imports by Brazil, Algeria, and Indonesia are each projected to exceed 7 million tons. Brazil’s climate generally does not favor wheat, and in some key wheat-producing states, winter corn is expected to provide better producer returns than wheat..
  • Imports by developing countries in Sub-Saharan Africa, North Africa, and the Middle East rise 11.6 million tons and account for 53 percent of the total increase in world wheat trade. Saudi Arabia has adopted a policy to phase out wheat production subsidies by 2016 because of water scarcity concerns, and imports are projected to jump by 3 million tons by the end of the projections.
  • 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, Vietnam, and some other Asian countries, strong economic growth and diversification of diets are projected to increase per capita wheat consumption
  • 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 about half of global wheat feeding.

Global wheat imports

World wheat exports. The traditional five largest wheat-exporting nations (the United States, Australia, the EU, Argentina, and Canada) account for 70 percent of world trade in 2009-18. 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 21 percent of global wheat trade at the end of the projection period, down from 26 percent in the past 5 years. By the end of 2007, the global stocks-to-use ratio had declined to the lowest level on record. A significant 2008/09 rebound in global production enabled stocks to jump and precipitated a decline in prices. However, after working down these larger stocks, much of it lower quality feed wheat, stocks are projected to continue to be lower than during the 1990s. Prices are projected to remain above pre-2007 average levels.

  • Shares of the world wheat market held by Canada and the United States decline slightly, while shares increase for the EU, Ukraine, Russia, and Argentina.
  • In Canada, increased demand for vegetable oils, especially rapeseed oil for human consumption and biodiesel production, and increasing demand for barley, are expected to reduce wheat area and limit any growth in wheat exports.
  • Ukraine, Russia, and Kazakhstan have become significant wheat exporters in recent years. Low costs of production, new investment in their agricultural sectors, and generally favorable weather since 2001 have enabled their combined world market share to climb to about 20 percent in the last 3 years. Russia is expected to increase wheat production for domestic feed use. 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 highly variable weather and yields, year-to-year volatility in production and trade can be expected.
  • 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 as domestic demand expands as fast as production.

Global wheat exports

Market Forces Constraints Future 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, primarily corn and soybeans. 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 relative returns to wheat. Over the next 10 years, U.S. wheat planted area is projected to fall from the recent high in 2008/09.

 

For more information, contact: Gary Vocke or Edward Allen

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Updated date: March 23, 2009