May 17, 2004

 

 

Wheat Market Instability Seen As The Only Certainty By US Agriculture Economist

 

Volatility in the world wheat markets could be explosive, an ag economist has warned. Or, depending on the weather, they could collapse.

 

In either case, "the opportunities for the U.S. government to intervene at the top or the bottom do not exist," said Daryll Ray, an economist at the University of Tennessee in Knoxville.

 

"There are no tools to do either one," he said last week during a visit with The Billings Gazette. Ray was in Montana for meetings with wheat farmers in Great Falls and Lewistown.

 

Because of the changes made in the 1996 Farm Bill and carried over in the 2002 version, the federal government has no way to stabilize prices as they did in farm legislation dating back to the Depression, Ray said.

 

"There is no way to keep stocks (grain supplies in storage) off the market," he said "There are no set-aside requirements nor farmer-owned reserves. We cannot isolate stocks."

 

Formerly, when grain stocks were high, the government required farmers to "set aside" and not plant a certain percentage of their wheat acres in return for price supports from the treasury. Under a farmer-owned reserve, the surplus grain could be retained when prices were low, or sold when supply was low and prices were favorable to the farmer.

 

"Now we have a wide open farm policy," Ray said. "The idea is that we can buy grain or soybeans from overseas" at any time.

 

That comment is illustrative of the current situation versus the spring of 1996, when wheat prices went to nominal record highs in April, May, and June. At the same time, the world stocks-to-use ratio went to a narrow range, forcing foreign buyers to push up the price of wheat to unseen levels.

 

The stocks-to-use ratio is the amount of grain available compared to the rate of world consumption. As that ratio narrows, prices typically rise. The stocks-to-use ratio now is similar to 1996, but wheat prices have not moved anywhere near the $6-$7 a bushel range that it hit in June eight years ago.

 

"The grain trade has decided that the stocks-to-use ratio is no longer valid," he said.

 

"We have a weather-determined market now more than ever," Ray said. "We have marginal stock levels, we have run them down.

 

"(Wheat) prices could be explosive if there is a poor yield this year," he said.

 

And while prices for soybeans skyrocketed in the past year, a bumper crop of the beans could have an opposite effect on that market, Ray said. "This could be a bumper crop year for corn and soybeans," he said. "The planting this year is way ahead and there have been good rains in the Midwest."

 

Ray said current U.S. farm policy is unsustainable and farmers cannot depend on grain prices for the future.

 

With the burgeoning dual deficits - federal budget and trade - both at record levels, will society continue to support $20-22 billion a year for payments to U.S. farmers, Ray asked.

 

He said current cash prices for wheat - $4.65 for spring wheat in Minneapolis and $4.12 for winter wheat in Kansas City ¡¡ìC are not up that much considering the stocks-to-use squeeze.

 

The United States "should get ready for the next shock," he said. The next one or two years of tight supplies would mean skyrocketing prices for both domestic and export customers.

 

Or, three years of bumper crops could drive the price down to 75 cents a bushel with a $35 billion government payment that it could not provide, Ray said.

 

Ray said his efforts are aimed at setting the stage for a more reasonable farm policy that evens out the volatility he anticipates.

 

"Otherwise, there will be more devastation in rural America," he said, referring to the agricultural crisis that took thousands of farmers off the land in the mid-1980s.

 

The U.S. Department of Agriculture last week released its world markets and trade report, and it gives credence to Ray's observations.

 

USDA reported that world wheat production is expected to grow for the first time in six years, with course grain (corn, barley, sorghum) set to rise to a record.

 

Notwithstanding these large increases, steadily rising consumption because of population growth and expanding livestock sectors will again outstrip world production.

 

As a result, the 2004/2005 ending stocks are forecast to fall for a fifth consecutive year. Over this period, global grain stocks have been slashed by half, with most of the decline coming from China.

 

Because of that, China is forecast to be the world's largest importer of wheat for the first time in nine years. For corn, reduced exports from China should help U.S. sales to surge to their highest level in 10 years.