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Despite high wheat prices, farmers not rolling in dough

Ethanol demand has not driven wheat prices to record high levels, wheat industry leaders told a Congressional subcommittee. World fundamentals, extreme market volatility and lack of technology development are to blame, they said.

In testimony before a House Small Business Committee hearing to examine food prices and small businesses, David Cleavinger, president, National Association of Wheat Growers, and Ron Suppes, chairman, U.S. Wheat Associates, said historically high wheat prices are the result of the following combination of factors:

  • Strong competition for acres among crops in an environment where wheat is losing competitiveness.
  • Production problems including poor weather conditions in many wheat-growing regions worldwide, including the United States, Australia and parts of Europe.
  • Global consumption exceeding production seven of the last eight years.
  • Increased world demand for food, especially high-quality food including wheat products, from both larger world populations and a rising middle class in developing countries.
  • Domestic wheat stocks are at 60-year lows and world stocks at 30-year lows.
  • A weak dollar is promoting increased exports from the United States.
  • Export restrictions by some countries have curtailed the world's access to wheat.

According to the wheat industry officials, the decline in wheat acres in the United States is not a recent phenomenon spurred on by biofuels. Wheat acres, they said, have been declining steadily for decades. Plantings are about 30 percent lower than in the 1980s.

“The availability of technology, including biotechnology, in competing crops like corn and oilseeds has raised the opportunity cost of growing wheat. From the perspective of a grower, this means that the wheat market has to pay more to encourage plantings. The entire wheat chain is paying a huge cost for our failure to adopt new technology, like biotech traits.”

Cleavinger and Suppes stressed that high wheat prices are not the sole reason for high food prices. For example, even at $12 per bushel, commodity wheat consumption costs each American, on average, less than $40 per year or about 10.8 cents a day. At $8 per bushel, commodity wheat consumption would cost each American an average of $26 per year or 7.2 cents per day.

They said that on average, a baker can make about 70 one-pound loaves of white bread out of a bushel of wheat. “At $4 per bushel, that makes the commodity wheat portion of a loaf worth about six cents. At $8 per bushel, it's worth about 11 cents and at $12 per bushel, about 17 cents.

“For pasta, the cost of durum in a one-pound package, even at today's higher prices, is still only 20 to 30 cents of the $1.50 per package cost paid by the consumer. About a year ago, this was roughly 12 to 15 cents. Raising the price of a cookie by 1 cent would cover a $9 per bushel increase in the price of wheat.”

Cleavinger and Suppes also opposed proposals to restrict wheat exports, release land currently in the Conservation Reserve Program or modify the renewable fuels standard.

To the latter, they pointed to analysis by the Renewable Fuels Association that removing 4.5 billion gallons of ethanol would increase gasoline prices in the short term by up to 31 percent.

They said Congress should focus on the impact of energy costs on high food costs. “Fertilizer prices are doubling year-over-year, and diesel fuel is now more than $4 per gallon. Increased energy costs have affected the cost of transportation of inputs to the farm and of the commodity away from the farm and of processing, marketing and transportation to the final market.”

Cleavinger and Suppes say that higher wheat prices don't mean that wheat growers are rolling in dough either.

They say that the vast majority of wheat producers didn't achieve sales at record highs because they had existing contracts that required delivery or had already sold to service debts.

The cost of producing wheat continues to rise, too, with input prices in some cases double what they were just last year. USDA's Economic Research Service estimates that the total cost of producing an acre of wheat will be $230 to $250 in 2008 and 2009 ($5.75 to $6.25 per bushel at a 40-bushel yield), versus $175.63 in 2002 ($4.39 per bushel at a 40-bushel yield).

Producers also face unprecedented market volatility. Trading limits for wheat have been modified a number of times in recent months which have allowed wider swings in the market price.

Higher prices have increased margin calls for those trying to hedge risk in the commodity market, putting stress on local elevators and, thus, farmers, who may no longer have the ability to forward contract with a local facility, Cleavinger and Suppes noted.

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