Mark Welch, grain marketing economist for Texas A&M AgriLife Extension Service, presented his wheat market outlook for short and long term at the 2017 Texas Wheat Symposium, Nov. 29, in Amarillo, Texas.
Welch began by reviewing what he said in conclusion at the same meeting in 2016.
“I showed this last chart here a year ago, when we saw wheat prices in the $5.50 range drop to $4.50 in October, November,” he said. “I stood up here and said with world wheat acres down for the 2017 crop, and demand still increasing, if we had even normal yields we would see carryover go down and to a degree offer us price support and I projected a futures-based price of $5.50 per bushel.”
However, Welch continued, while wheat acres were down, they weren’t down by much and globally—particularly in large wheat-growing countries—there were record yields that raised global wheat yield averages and in fact the number of days of use on hand of wheat went up and continued to pressure prices United States farmers saw at the elevator. And, while the drought in the northern High Plains helped rebound the price for some, from $3.89 a bushel in 2016 to about $4.60 in 2017, it may not be a sustainable bounce, Welch said.
That was then. Looking forward, Welch said if world wheat acres go down like he thinks they will, and demand and consumption increases according to trends, and we have anything close to normal yields, wheat carryover should drop and that means he is fairly bullish on wheat prices for 2018. But he cautioned there are still many volatile contributing factors that must line up for better prices and farmers will need to be able to capitalize on the opportunities when they come.
The good news for U.S. farmers in the coming year is the world per capita grain use figures.
“There is continued growth in grain consumption, not an increase in demand,” Welch said. This strong growth trajectory from the 2000s in consumption, he said, is based on the increase in disposable income in several significant emerging economies such as Brazil, Russia, India, Indonesia, China and Mexico. And U.S. wheat farmers benefit when those emerging economies continue to grow their middle classes, because middle classes consume more and higher quality grains and commodities.
“Look at the economic growth in those developing economies, separate from the rest of the world in 2002, 2003, 2004,” Welch said. “As they grew and exploded in growth categories it’s good for what we do, and to develop our price outlook.”
The catch is that U.S. wheat farmers have to compete on a world stage.
“Though the world wheat production was somewhat lower for the 2017 crop, it wasn’t by much,” Welch said. There have been four record world wheat crops in a row, and you have to go back to 1960 to see that. Major wheat producing areas, like the former Soviet Union countries, have had outstanding crops the last four to five years, and that has turned the export community on its ear, Welch said.
The carryover picture on the world market reflects the tripling of wheat yields since 1960.
“Demand is consistent and growing, but we’ve outpaced it with production,” Welch said. “What will we do with a 132-day supply instead of the average 110-day supply?” He showed the production trend line for wheat at about 51 bushels per acre for 2018, which would be another record crop if just that trend is matched. That doesn’t bode well for the price outlook, he surmised.
“The season average U.S. price for 2018, based on harvested area, yield projection and demand and consumption should be about $4.18 to $4.20 a bushel, that’s coming off of $4.60 last year,” Welch predicted. “Nothing is putting us off the path without significant change.”
One answer is to reduce global wheat acres, Welch explained. And while harvested acres have come down to the last couple of years and are expected to be at 540 million acres in 2018, there are some competing countries using minimum price supports to maintain their wheat acres when economics would suggest farmers should switch to other commodities, he said. As of now, U.S. Department of Agriculture is predicting planted wheat acres around 45 million, and that’s farmers responding to the economics and switching to something else if they can, he said.
Carryover will be a critical factor in determining if U.S. wheat prices get to $5 or $6, Welch said.
“We have been in the 130-day range the last couple of years,” he said. “To get to $5 or $6 wheat we have got to get the days down to 120. And to get up to $6 or $7 wheat, we have to get the days of use below 110. Major significant changes will have to happen in global wheat production to create that environment, but it’s certainly possible.”
“We export about 1 billion bushels from the United States,” he said. But, he countered, the nations of the former Soviet Union have excellent crops and cheap currency and it’s inexpensive on the global market and the quality is pretty good for coming out of that part of the world. The bulk of global wheat importers is based in northern Africa and the Middle East, as well as the Asian community, Welch said. Meanwhile the 12 countries of the former Soviet Union account for 32 percent of global exports and if they continue to grow their market share that changes competition for our production, Welch said.
“We need relationships and agreements and cooperation with our trading partners,” he said. “One of the most dynamic volatile components of our price of grains is exports and the degree to which exports make up a percentage of our production.” Particularly wheat and grain sorghum, he added.
“Access to markets based on favorable trading arrangements and good credit terms are very important with those commodities,” Welch said. “With expanding competition with other producers around the world for those markets it raises the stakes even more.”
If we lose market share to other countries willing to enter into trade agreements, will U.S. wheat growers get it back? And, will they get it back quickly? That, Welch said, is the real question. Forefront of many growers’ minds is the Trans-Pacific Partnership withdrawal and the renegotiation of the North American Free Trade Agreement, and Welch cautioned that when you lose market share, or you fail to maintain relationships with trading partners, it can be very difficult to get it back.
“We are seeing many of our competitors deliver a very high quality product at times of the year offset to when our production is available and we have to be very careful of becoming the residual supplier,” Welch said. “Particularly, if our prices are higher and our quality is just equal. But there are some things that set us apart. For U.S. wheat, number one is that we are a consistent high quality supplier of wheat and people can count on us. When we say it’s a certain grade, or quality, it is. And we can preserve that quality from one cycle to the next.”
Bottom line, in the current long-term lower price environment, Welch advised growers to do their financial homework and really work on cutting their costs by as little as 5 percent to give them the edge.
Now, he said, is the time to do the financial homework and be familiar with your cost of production and at what price works for you.
“If we’ve done our homework and we know what price works, when the market hands that to you are you able to take advantage of it?” Welch asked. “This is the time to figure out what works for you and when it shows up, grab it.”