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Low wheat prices may not be the cure for low prices

TAGS: Outlook
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Today's wheat prices may be the result of too much wheat in storage and poor milling quality wheat.

An old cliché says, “The cure for low prices is low prices.” In today’s world wheat market, this may not be true. The belief that higher wheat production results in lower prices also may not always be true.

Current wheat prices may be a result of too much wheat in storage and/or poor milling quality wheat, plus the fact that the Black Sea exporters (Russia, Ukraine, and Kazakhstan) have been dominating the wheat market.

Using the 10-year average, demand for U.S. hard red winter (HRW) wheat is about 46 percent export and 54 percent domestic. Domestic use is made up of food (46%), seed (4%), and feed and residual (4%).

Over the 10-year period 2008/09 through 2018/19, HRW exports as a percentage of total use averaged 46 percent with a range of 61 percent (2010/11) and 33 percent (2015/16). Note that during the 2010/11 wheat marketing year, Burlington, Oklahoma, wheat prices went from $3.40 (June 11, 2010) to $8.99 (February 9, 2011), a $5.60 price increase.

In the 2010/11 marketing year case, the cure for low prices may have been poor growing conditions and declining production estimates in Russia and Ukraine.

The wheat market finished the 2009/10 marketing year with the highest U.S. ending stocks since the 1987/88 marketing year and near record world ending stocks.

2009/10 HRW wheat marketing year ending stocks were 385 million bushels with a stocks-to-use ratio of 49 percent. Plus, the wheat in storage was mostly low milling quality.

In the June 2010 World Agricultural Supply and Demand Estimates (WASDE) report, world wheat production was projected to be 24.7 billion bushels, the third highest amount on record. Russian and Ukrainian wheat production was projected to be 2.8 billion bushels. Wheat production in Canada, Argentina, and Australia combined was projected to be 2.1 billion bushels.

The 2010 U.S. HRW wheat crop was good milling quality wheat. However, excess world stocks had depressed prices ($3.50).

In the July 2010 WASDE, U.S. wheat production was increased from 2.1 billion bushels to 2.2 billion. Production in Argentina, Australia, and Canada was lowered to 2.0 billion bushels. Russian and Ukrainian wheat production was lowered to 2.7 billion. Burlington wheat prices increased from $3.50 in mid-June to $5.00 in mid-July.

Russian and Ukrainian wheat production continued to decline while U.S., Argentine, Australian, and Canadian wheat production continued to increase. In the November 2010 WASDE, U.S. wheat production had increased from 2.1 billion bushels in June to 2.2 billion bushels in November.

Argentine, Australian, and Canadian wheat production had increased from 2.1 billion bushels to 2.3 billion bushels. Russian and Ukrainian wheat production had declined from 2.8 billion bushels to 2.2 billion. Russian and Ukrainian 2010/11 wheat production ended up at 2.1 billion bushels, and Burlington wheat prices peaked in February at $8.99.

Note that it was not relatively low prices that caused higher prices. It was significantly lower than expected Russian and Ukrainian wheat production. Canada’s wheat production was slightly below average, but was higher than projected in the July 2010 WASDE.

The current wheat supply and demand conditions are about the same as they were in June, 2010 which is relatively high wheat stocks with a limited amount of milling quality wheat.

During four out the last five wheat marketing years, both U.S. and Australian wheat production has been below average. Canadian wheat production has been near average. Argentine wheat production has been above average three out of the last five years. And wheat prices have been relatively low.

Low prices may be a cure for low prices. But, in 2010, the cure for low prices may have been a failed Russian and Ukrainian wheat crop.

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