By Truth About Trade

Two years ago wheat market prices were at record highs as buyers were concerned about the size of the 2008 wheat crop. Now, carryover supplies are building, market prices are much lower and prospects are bright for another good crop this year. Despite these better times for wheat consumers, policymakers should not lose sight of the fact that international wheat trade is essential for many consumers and wheat is part of an integrated world grains and oilseeds supply market.


Wheat is a high trade crop. In recent years, trade has been 18-19 percent of world consumption, about 115 million metric tons (MMT), except for the 2008/09 year (July 1 - June 30) when trade was 143 MMT, 22.3 percent of consumption. The Foreign Agricultural Service of USDA estimates for 2009/10 put trade at 126 MMT, 19.4 percent of consumption. For comparison, rice trade in 2008/09 was 29 MMT, 6.6 percent of consumption, and coarse grain trade, mostly for livestock feed, was 110 MMT, 10.3 percent. Whole soybeans are still the leader in percent of trade with 77 MMT traded in 2008/09, 39.8 percent of the world crush of soybeans.


The two largest wheat importing regions in 2008/09 were the Middle East at 28.3 MMT, 20.2 percent of world trade, and North Africa at 23.5 MMT, 16.8 percent of the world total. These were record large for both regions and imports are lower for 2009/10, but they will still be the number one and two importing regions. Imports were 53.4 percent of wheat consumption in the Middle East and 62.8 percent in North Africa. Sub-Saharan Africa was the third largest importer of wheat in 2008/09 at 13.4 MMT, 9.6 percent of world trade and 70.9 percent of consumption in the region and will again be the third largest importer in 2009/10. The next four largest wheat importing regions in 2008/09 were South America at 12.7 MMT, 53.5 percent of its domestic consumption, Southeast Asia at 12.3 MMT, 100 percent of consumption, East Asia at 11.3 MMT, 9.9 percent of consumption, and South Asia at 10.7 MMT, 10.2 percent of domestic consumption.


Market prices are sensitive to end of the marketing year carryover stocks because they can fill unanticipated demand or protect against a production shortfall in the following marketing year. World carryover stocks minus Chinese stocks are the key variable; China is a large producer and consumer of wheat and usually has large carryover stocks, but a small amount of trade. From 2001/02 through 2005/06 world carryover stocks without China ranged from 91 MMT to 127 MMT. End of year stocks in June 2007 were 111 MMT and declined to 74 MMT in June 2008. With virtually all commodity prices moving higher in early 2008, the wheat market had a good fundamental market reason to join the parade of higher prices.


Despite record wheat consumption in 2008/09 and record trade in wheat, carryover supplies increase by over 40 MMT to 117 MMT because wheat production rebounded to 683 MMT after only 610 MMT in 2007/08 and 596 MMT in 2006/07. Production in 2009/10 was just short of the record at 678 MMT and world carryover supplies minus China are expected to be record large at 137 MMT in June 2010. World wheat area harvested has been about 556 million acres each of the last two years, 25 million acres higher than most of the last ten years and near the highs in acreage set in the early 1990s and again in the late 1990s. Yields per acre have also been record large the last two years at 45 bushels per acre after three years in a row of yields averaging about 38 bushels per acre.


Wheat production is driven by two related factors, wheat prices and weather. Wheat prices drive wheat acreage into or out of production depending on the relative prices of other crops like coarse grains and oilseeds. Weather is driven by its own variables of moisture and temperature. While adverse weather is generally thought of as being too hot and too dry, in the U.S. wheat acres are down by 6 million for the 2010 crop because weather was too cool and wet at planting time last fall. Despite the shortfall in U.S. wheat acreage, the International Grains Council expects wheat acreage to be down less than one percent for the 2010 crop. Moisture prospects are good for most of the northern hemisphere crops and if yields are at trend levels production could again slightly exceed consumption. That could cause continued low prices and some further shift away from wheat plantings.


Wheat consumption will likely continue to grow over the coming decade as consumers become more urbanized and seek more varied diets. Over the last 20 years worldwide wheat consumption has grown from about 550 MMT per year to almost 650 MMT, or about 5 million metric tons per year. Over that same time yields per acre have grown from 36 bushels per acre to the current 45 bushels per acre. If that could be repeated over the next 20 years the additional demand would be met without increasing wheat acreage. The U.S. has lost 24 million acres of wheat harvested over the past 30 years as other crops have been more profitable. If this were to continue in the U.S. and/or spread to other countries, acreage would need to increase further in other areas or yields increase at a more rapid rate.


Market events of the last two years have caused more attention to be given to conventional wheat breeding, fertilization and irrigation programs. Wheat producers in the U.S., Canada and Australia have also encouraged public breeders and private companies to develop biotech varieties to increase yields and reduce the variability in yields by controlling insect pests and weeds, reducing wheat head diseases, providing greater drought tolerance and increasing nitrogen use efficiencies. Wheat has to compete with crops that benefit from new technologies.


Under current market conditions, it is tempting for governments to become complacent and assume they can intervene in wheat markets without disturbing the underlying benefits of production and trade that now flow to producers and consumers. Those actions have a history of failure. Wheat producers and consumers in different regions of the world are linked together to the benefit of both groups. Free trade is an essential part of the communication system that tells wheat producers to devote more resources to wheat or seek out other more profitable crops to plant. Now is the time to remain aware of market conditions and listen to messages about changes to the benefit of producers and consumers.