Source: Nathan B. Smith, University of Georgia
Georgia wheat that was harvested in 2010 fell short of last year due to lower acreage planted and harvested by growers. Planted acreage dropped to 250,000 acres in 2009 due to a poor crop harvested in the Spring and poor planting conditions during the Fall. Price was also at a low point during planting which discouraged many growers. U.S. soft red winter wheat production dipped significantly also. Despite the reduction in production of soft red winter wheat, U.S. wheat supplies are more than adequate going into 2011.
Soft red winter (SRW) wheat made up about 11.5percent of total U.S. wheat production in 2010. However, SRW made up at least a quarter of beginning stocks in June which weighed heavy on prices for much of 2010. Georgia's wheat market is made up of local mills in Georgia and neighboring states and the export market. Mill demand does not fluctuate much compared to exports but the domestic mill demand is limited. Thus, exports year-to-year end up influencing the price of soft red winter wheat. When exports are down, basis widens and prices fall in Georgia. Prices were down until recently when global supply concerns pushed wheat prices back above $6 per bushel. Prices are not expected to remain above $6 for a long period as there still remains an ample global supply of wheat.
All wheat production for 2010 is projected to be 2.2 percent higher than last year at 2.265 million bushels. Soft red winter and durum wheat production was down while the rest of wheat types are up for 2010. SRW and durum represent the two smallest contributors to total production at 260 million and 109 million bushels respectively. Yields are down for SRW and durum while hard red and white types are up in 2010. All wheat acreage was down mainly due to SRW. For Georgia, a recent downward trend in acreage looks to have bottomed in 2010 at 250,000 planted acres. Georgia yields have increased over the long run with trend yield at 50 bushels per acre. The last two years, however, has seen yields at 42 and 40 bushels per acre in Georgia. The abandonment rate in 2010 rose to 42 percent leading to a 145,000 harvested acre estimate. The 10-year average abandonment rate in Georgia is 35 percent.
Total supply of soft red winter is forecast to drop from 600 million bushels to 520 million bushels for the 2010/11 marketing year. The total for all wheat in the U.S. has increased, however, from 2.99 billion bushels to 3.34 billion bushels. The carryover for SRW is expected to drop 25 percent to 179 million bushels representing a 52 percent stock-to-use ratio.
While production was ratcheted back in the U.S. last year and stocks are projected to lower again this year, the world wheat production situation has been affected by drought in the Black Sea region and as a result world wheat production is projected to fall by 5.2 percent in 2010. This will cut into surplus stocks, but, on a historical basis there will still be ample supplies of wheat globally. Global use continues to climb and there is some long term concern that wheat production will continue to lose acreage to corn and soybeans causing a shortage of wheat globally down the road.
After a steep drop in total disappearance of wheat in 2009/10, all use categories are expected to recover in 2010/11, particularly exports. Total U.S. wheat use for the 2010/11 marketing year is projected to end at 2.44 billion bushels, an increase of 20% from 2009/10. Total domestic use is expected to increase 4.3 percent to 1.186 billion bushels. Food use represents 80 percent of domestic use at 940 million bushels. Feed use is forecast to rebound to 170 million bushels, a 13 percent increase over last year. Exports will be a key as Russia, Canada, Argentina, and Australia deal with production problems. Exports are projected to jump to 1.25 billion bushels which would exceed total domestic production. However, SRW is not expected to capture the increase in exports and are forecast to remain flat.
World wheat use or consumption is expected to increase to 24.4 billion bushels which would be a 2 percent increase. Global use continues to show strength as well as trade leading to a reduction in global stocks. With consumption outpacing production this year, ending stocks are projected to drop 10 percent to 6.4 billion bushels. World ending stocks are still a billion bushels higher than the 7 year average of 5.4 billion bushels.
Basis has been wider than historically for a couple years now. Volatility has been introduced in the commodities markets through index and managed funds trading. Currently, funds collectively own one billion bushels of wheat on the futures markets. When funds sell or buy to adjust their positions, it move prices up or down in the short run that may not reflect the fundamentals in the wheat market causing price volatility. Economic uncertainty also leads to basis volatility that may not have been a factor in the past.
Wheat prices have recently rallied on news of production problems in Russia and the announced ban of Russian exports for the rest of 2010. Reduced production in Canada, Argentina, and Australia has also given wheat futures support. Basis in Georgia has weakened during the rise of futures but prices are still $2 per bushel or more higher than the same period a year ago. Cash wheat prices for SRW fell below $3 per bushel for a period last year and now are above $6 per bushel. New crop basis for 2010 wheat was around $1 below July futures and is now around $1.5 under July futures for 2011 wheat. From a historical perspective, prices are attractive for new crop (2011) wheat. It has been two years since SRW cash prices were above $6. Given the outlook for supply and demand, some price protection should be considered through either contracting, futures or options. It is never known what the weather will do and prices could go higher, but the fundamentals don’t support higher prices at present. A drought in the U.S. would be cause for prices to rally higher than their current level but under "normal" conditions prices will have a hard time holding their current level. Watch for opportunities as corn and soybeans bid for acres come spring, especially if corn production is short in 2010.
The U.S. all wheat price is projected to range between $4.95 and $5.65 for the 2010 crop. Georgia wheat prices are traded at a discount compared to these levels. The key for prices in Georgia in 2011 will be export demand. If the soft red winter wheat market picks up some market share in wheat exports, then basis should improve. An increase in exports will depend upon whether global production recovers over the next six months or continues to decline bringing the U.S. in the market as a residual supplier to importing countries.
Outlook for the 2011 Crop Year
The U.S. wheat outlook is improving but there is still an ample supply of U.S. wheat. Soft red winter wheat stocks have declined due to decreased production. Higher prices at planting will increase acres some but relatively high corn and soybean prices will limit the increase of SRW acres (abandonment) come spring. Global production will look to increase in traditional exporting countries.
Cost of production is expected to increase as seed supply is limited for many of the desired varieties. Seed costs could rise by 40 to 50 percent. Fuel and fertilizer is expected to chase higher commodity prices and rise 10 percent. Opportunities to contract wheat for $6 per bushel should be considered but with protection. Revenue insurance should provide protection to contract early as the price election for yield and revenue protection is $7.14 per bushel for 2011 wheat. Premiums will be higher due to the higher price but should represent 7-8 percent of the total revenue guarantee depending on coverage level chosen. Pricing a portion of expected wheat production for 2012 should also be considered with higher prices.
The bullish run in wheat prices should result in a few more acres of winter wheat planted. Georgia wheat growers are encouraged to watch for rallies during the seasonal period before planting. Spring rallies are also a time to watch due to corn and soybeans competing for spring acreage. Basis should improve between now and harvest, especially if futures prices begin to fall. Marketing is an important part of farming but it takes consistent monitoring of the market to take advantage of opportunities. In the long run, low cost producers will be successful in wheat production. Low cost producers are those who maximize yields while controlling costs. Knowing your costs and managing production are the key combination to profitable farming.