A huge shift in foreign wheat production
There were big changes this month in the estimate of foreign wheat production. In November USDA projected wheat production outside the U.S. at 648.2 million tonnes (23.8 billion bushels). The estimate released this week came in at 653.5 million tonnes (24.0 billion bushels) due mostly to a 4.3 million tonne increase in Canada. The month-to-month increase in production is large, but the year-over-year increase is huge. Foreign wheat production in 2012/13 is put at 594.5 million tonnes (21.8 billion bushels). Foreign production outside the U.S. is up almost 2.2 billion bushels from a year ago, which is essentially an extra U.S. wheat crop.
click image to zoom So why is the increase in foreign wheat production of concern? The U.S. needs to export about half of the wheat we produce. To some extent we remain the residual supplier, so the size of the foreign deficit (production minus consumption) is a key factor in how large our export volume will be. Last year the foreign deficit was 1.7 billion bushels, but this year it is 541 million bushels. Which of these deficit levels is closer to “normal” will have huge implications for the long-term outlook for the U.S. wheat sector. In general, U.S. exports need to be at or above 1 billion bushels per year.
Considering the huge swings in foreign wheat production, the foreign trend wheat yield is pretty stable. Using data for the last 14 years, the trend yield for wheat outside the U.S. increases at a rate of just over 1.3 percent per year. Excluding the years that are outside of one standard error of the trend boosts the annual change from 0.041 tonnes per hectare per year to 0.043 tonnes per hectare. For this analysis we will stick with the lower trend yield calculation.
click image to zoom Over the last decade foreign wheat acreage has been rising and the 2013 total came in at 201 million hectares (nearly 500 million acres) compared to 194 million hectares (479 million acres) in 2000. Much of the increase has been in the countries of the former Soviet Union. In fact wheat acreage in Russia, Ukraine and Kazakhstan has increased almost 6 million hectares over the period. Assuming that foreign wheat area continues to rise, the total reaches about 206 million hectares by 2020. The combination of 206 million hectares of wheat and a trend yield of 3.47 tonnes per hectare puts foreign production at 714 million tonnes.
click image to zoom If we use the same approach in calculating foreign wheat demand, the total is 721 million tonnes in 2020. Clearly these trends could spell real trouble for the U.S. wheat market. We need to export about 27 million tonnes of wheat per year (around 1 billion bushels), but the average calculated deficit for the 2014 through 2020 period comes out at 13 million tonnes – less than 500 million bushels. It is hard to tweak the numbers enough to significantly change the end result. Maybe the expansion in the FSU countries will slow. Maybe the trend yield growth will be slower in the future. Maybe demand growth will perk up significantly. But if none of these changes happen, we could see further declines in U.S. wheat acreage over the next 7 years.
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