Historic rises in farm input costs and falling wheat prices will likely add up to reduced profits and further declines in U.S. wheat acres, according to USDA’s Economic Research Service.

In its March 2009 outlook on wheat, the ERS noted that forecasted production costs for wheat farms show that current high wheat prices will allow a greater share of producers to cover their production costs in 2008 (90 percent) than in 2004 (82 percent), despite higher input costs in 2008.

However, if farm-gate prices for wheat continue to fall into 2009, and if prices for inputs do not drop off similarly, many more wheat producers may find themselves unable to cover production costs and the U.S. wheat sector may see further attrition of planted area. Analysts expect U.S. winter wheat acreage to fall for 2009.

In Arkansas, wheat farmers say they have cut acres significantly, perhaps as much as 60 percent. Other Mid-South states are also reporting large reductions.

ERS economists Mir Ali and Gary Vocke say wheat prices rose on the coattails of many other agricultural commodities in 2008. In addition, low stocks and adverse weather conditions around the world had tightened global supplies of wheat in 2007.

The resulting increase in U.S. wheat exports, which was the highest in 15 years, depleted the surplus U.S. supply, contributing to the lowest ending stocks since the late 1940s.

The farm-gate season average price rose to $6.48 per bushel in 2007-08, besting the previous high of $4.55 per bushel in 1995-96.

Although U.S. wheat prices have fallen since spring 2008, they remain high by historical standards, according to ERS. The season-average price range forecast by USDA for the 2008-09 marketing year is $6.70 to $6.90 per bushel. In part, prices received by U.S wheat producers have remained high because of the large quantity of wheat that was forward priced during spring 2008, when prices were very high. Also, part of the wheat crop was marketed early in the market year before prices started to drop.

However, rapidly rising input costs have offset the unprecedented run-up in wheat prices for producers. USDA’s National Agricultural Statistics Service reports that prices paid for production inputs have been rising since 2004, particularly for fuel and fertilizer. Both fuel and fertilizer prices have come down in recent months but remain high.

Fertilizer prices also have been affected by the rapidly rising demand for fertilizers, especially in China, India, and Brazil.

In addition, the fall in the value of the U.S. dollar in recent years has raised the price of imported energy and fertilizer for U.S. farmers. The United States imports over half of its nitrogen and over 90 percent of its potash used each year.

Internationally, Ukraine and Russia have emerged as new competitors with the United States in foreign markets in years when their production is high. Traditional global competitors include Canada, Argentina, Australia, and the European Union. The overall result is a slightly smaller expected share of expanding world wheat trade for U.S. wheat.

Genetic improvement for corn and soybeans are also affecting U.S. wheat acreage, according to ERS. New varieties of corn and soybeans can be planted farther west and north in U.S. areas with drier conditions or shorter growing seasons. Plus, herbicide-resistant varieties in corn and soybeans make it easier for farmers to control weeds.

The slower pace of genetic improvement has resulted in little growth in wheat yields, which makes wheat a less attractive option for farmers.

ERS researchers say that one reason why improvements in wheat genetics have been slower than for other crops is because of lower potential returns to commercial seed companies, which discourage investment in research.

For example, farmers are accustomed to buying seed corn each year because seed saved from a hybrid cannot be used for a subsequent crop. This creates a large annual market for seed companies. In contrast, many wheat farmers, particularly in the Plains, use seed saved from the previous year’s crop rather than buy new seed from dealers every year. This practice sharply reduces the potential market for branded commercial seed wheat.

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