Changes in government farm programs have greatly reduced government influence of wheat production and storage decisions. The market also appears to be unwilling to pay storage and interest costs to maintain sufficient grain stocks to cover short crop years.
On June 20, 2008, the range of wheat prices in Oklahoma and Texas was $8.15 to $8.57. On Dec. 4, 2008, the range of prices was between $3.96 and $4.40 (-$4.20). The price range on June 20, 2007, was between $5.26 and $5.60. Dec. 4, 2007, prices ranged between $8.31 and $8.54 (+$3.01).
Oklahoma and Texas wheat prices peaked on March 12, 2008. Oklahoma and Texas prices ranged between $12.48 and $12.84.
Wheat ending stocks for the 2007-2008 marketing year were 306 million bushels and are projected to be 603 million bushels for the 2008-2009 marketing year. The five-year average ending stocks are about 500 million bushels.
One reason for volatile prices may be government program changes starting with the 1985 farm bill. Changes in the 1985 and 1992 farm bill essentially took the government out of the grain storage business. After the 1992 farm bill, storage costs (storage charges plus interest on the value of the grain also called “the cost of carry” or “carry costs”) have to be paid by either the grain storage and handling industry or producers.
Over the long run, commercial elevators and grain merchandisers do not want to own grain in storage. Thus, producer grain prices tend to be set at a level sufficiently low to cover carry costs if purchased grain has to be stored for a long period of time. The grain industry passes the carry costs to producers.
A result of the 1995 and 2002 farm bills was to remove most of the government farm program's influence on which crops are produced. After the 2002 farm bill, producers were relatively free to plant any crop without a government payment penalty.
Now, grain production decisions are based on comparative yield and price expectations. Expected profit has the biggest impact on which crop is produced.
The market influences producer grain production decisions by raising and lowering prices. An example is the corn market bidding up corn prices to buy crop land from soybean and other crops in 2006, 2007 and 2008. The reaction from the soybean market was to bid up bean prices to compete for land and other resources.
It also appears that the market is not willing to pay the carry costs required to ensure grain reserves needed to cover short crop years. Since the 1999-2000 marketing year, U.S. wheat ending stocks have declined from 950 million bushels to 306 million bushels last year.
Ending stocks for the 2008-2009 marketing year are projected to increase to 606 million bushels or an increase of 300 million bushels. Three hundred million bushels is not much of a reserve in storage.
The five-year average U.S. wheat use (domestic and exports) is about 2.2 billion bushels. One year's production at 1.9 billion bushels or less would erase excess wheat stocks and result in another price spike like the one experienced during the 2008-2009 wheat marketing years.
Improvements in the world's wheat storage and transportation system have reduced the time it takes to originate and obtain delivery of wheat. More countries are exporting wheat than 10-year ago. A more efficient marketing system and more exporting countries reduce wheat stock requirements and increase the potential for price variability.
Price variability appears to be an integral part of the world wheat market. Current wheat prices are below costs of production, which signals that the market wants less wheat produced in 2009. Relative low prices will result is producers planting less spring wheat acres and less wheat acres in the Southern Hemisphere in 2009.
The market works and the current market structure have made financial management an essential part of survival and profit. Marketing strategies that take emotion out of marketing decisions are also essential.