Farm Bill Flash A Newsletter on Farm Programs, Farm Policy and Market Insights Jon Newkirk, Extension Economist February 9, 1999...........Issue 19 The January 12 USDA winter wheat seeding report says winter wheat planted acreage is at a 26 Year Low. So why have prices been down since???? There are glimmers of hope for wheat markets. There are also some very big negatives and some pretty gray clouds on the horizon. Pay attention to all the news, not just winter wheat planting news! On market matters, this issue blends the information from the USDA Grain Stocks Report, the World Agriculture Supply and Demand Report, and the Winter Wheat and Rye Seedings Report - all of which were released on January 12, 1999. I've also included commentary by Des O'Rourke on the International scene and by Margaret Viebrock on effective partnerships. (PLEASE NOTE FEBRUARY 10 USDA WASDE REPORT UPDATE TOWARDS END OF NEWSLETTER) U.S. Winter Wheat plantings down 7 % from last year to lowest level since 1972. Washington winter wheat plantings are down 14 %. This has the potential to become good news but isn't yet. To have a positive impact on prices, the acreage reduction will have to translate into a production reduction large enough to make a dent in the U.S. wheat stocks we are carrying. Spring wheat numbers are NOT in and we've had three or four very good weather years for wheat in the U.S. The U.S. average yield in 1998 was 43.2 bu/ac. This was a 9.6 % increase over the 1997 average yield, which was the record until this year. If the 1998 U.S. yields repeat in 1999, the chances of reducing the large ending stocks in the U.S. will be slim unless there is a major crop failure somewhere else in the world. If 1999 U.S. yields are lower, say closer to those of 1997, then the just announced winter wheat acreage reduction begins to look like good news. Just as the other factors in the market overshadowed the acreage reduction news the past two weeks, they are likely to continue to do so over the next few months, so read on . . . U.S. wheat stocks, on December 1, 1998, were up 17 % over one year ago. As a result, USDA says the 1998/99 U.S. ending stocks/carry out on May 31, 1999 will be the largest since 1990/91 at over 900 million bushels. This is a lot of wheat! Unfortunately I believe USDA is overestimating exports and U.S. wheat consumption so my own prediction is the U.S. carryout will be closer to 950 mil. bu. The 98/99 carry out will represent about 36.5 % of all U.S. wheat used in the 1998/99 marketing year, which ends May 31, 1999. The carryout from this year becomes the beginning stocks for next year and will be a large part of next year's supply. Before a single kernel of the 1999 U.S. wheat crop is harvested, almost 37% of what is needed to meet next years U.S. export and domestic demand will already be sitting in the bin. It will take either a large drop in U.S. production to work into these stocks or a major crop failure somewhere else so that our demand increases significantly. White wheat ending stocks are expected to be reduced by 20 million bushels from 90 to 70 million bushels during this marketing year. Seventy million bushels begins to look hopeful and shows white wheat stocks are being worked off this year. This is good news! Soft red wheat stocks to increase 87.5 %, from 80 million bushels to 150 million bushels in this marketing year. The 150 mil. bu. represents 40.2 % of the soft red wheat used or exported from the U.S. Soft red wheat is a substitute for white wheat in some markets and will hold down white wheat prices to some extent. The world's wheat ending stocks will be reduced during this marketing year by 11.7 mmt. to 124.95 mmt. but still 13 mmt. higher than two years ago. You hear and read often that world wheat stocks are at critically low levels. That may have been true historically, but I'm not so sure in today's market. The world's ending stocks are still well above the 110 to 115 mmt. level necessary to bring serious concerns in the market about the low level of reserves. Last year Russia was an exporter of wheat, albeit mostly feed grade wheat. This year their production has fallen so badly, they and the other Soviet State made up for most of the drop in World wheat stock levels. If their production recovers this year, that could reverse the one-year drop in the World's stock levels. Drought problems in China are making the marketing news. I would caution anyone to make too much of this - even if true. China's wheat stocks this marketing year, while down from last year, are still well above two years ago and China's stocks were high then. China still has not lifted their Grain Bag policy (see Farm bill Flash, Issue 11, May 1997) which has the effect of restricting imports. Additionally, China has several trading companies in deep financial trouble. The total of the wheat stocks of Australia, Argentina, Canada, and the European Union 15 will increase this marketing year by 18%. Argentina shows a very small drop in stocks but all others are up. If we look at the stocks to use (STU) ratio of the World's major exporters, this group plus the U.S., it is 21.4%, up from 17.9 a year ago. The increase in stocks of the world's exporters is not good news for prices in the short run. My initial take is that there will need to be a serious drop in world production of the new crop for there to be a serious decline in stocks. This uncertainty will help create the weather market of the next few months. Winter wheat acreage reduction - what if? Here is one "what if" scenario to help put the reduction in winter wheat acreage in perspective. If all 1999 U.S. wheat acreage is 7% less (winter wheat acreage is down 7%); and if U.S. wheat exports follow the past three year's trend and are up about 3 %; and if U.S. domestic use stays about the same; and if the U.S. average yield declines this year about 10%; then we might expect a reduction in U.S. wheat stocks in the 200 million bushel range. U.S. stocks levels would still be about 700 mil.bu. compared to 722 mil.bu. in May of 1998, and still 256 million bushels above the 444 mil.bu. available in May of 1997. If we were to repeat last year's record yields instead of having a 10% reduction in yields, then there would be little reduction in U.S. stocks during the 99/2000 marketing year. U.S. white wheat stocks are in better shape than the other wheat classes (durum wheat stocks will almost triple this year). If spring wheat acreage in Oregon, Idaho and Washington is down as well, we could see white wheat production reduced enough to help further reduce stock levels. Stocks in Australia, and Canada are up which makes it more difficult to get a handle on the impact in white wheat markets. Crop progress in white wheat areas may have impact in our markets because white wheat stocks are getting down. The white wheat situation is beginning to glow just a bit. The question remains, in light of the other large stocks, how far up can our prices go? What does it all mean? - First, the large level of stocks that the U.S. and the available stocks of the other major exporters will dampen the markets response to any bad news about the new crop's growing conditions. My own "opinion" is that any move in the market will depend on whether the reduction in U.S. wheat acreage translates into a large drop in production. Unfortunately for the white wheat market, the huge stocks of soft red wheat will hold in check any really meaningful upward pressure on white wheat prices until the new crop picture is clearer. We've had increases in U.S. wheat exports for the past 3 years in spite of the strong dollar. The strong dollar will make it difficult for the U.S. to increase its share of the export markets unless a competitor has a crop failure. Additionally the international economic indicators look much gloomier than we are seeing here in the U.S. So we are back to the production question. How good can you predict the weather? In closing - finally . . . We are entering a time of market uncertainty - but there is hope. There are signs that the market could move upwards, but the fundamentals would suggest any increases in price would be modest if they in fact do show up. There are economic clouds on the horizon that may cause rain to fall on our parade (see Des O'Rourke's comments that follow). The market will react to crop progress reports here and abroad but the question is how much. I think (dangerous stuff - my thoughts) that stock levels will ultimately hold things down or at least moderate the upside possibilities until the size of this year's crop is more certain. But with these market conditions, anything is possible.The PNW Outlook Report (http://pnw-ag.wsu.edu) says it is reasonable to expect higher Portland prices next year, in the $3.40 to $3.75 range. Michigan State University economists are suggesting an average price increase in the $0.45 range. I'll repeat myself. This is a time of uncertainty in the market, so stay tuned. IMPORTANT NOTE: The crop insurance sales closing date for winter wheat and a number of other crops has been reopened and is now MARCH 15. YES, last fall's sales closing date has been reopened. Premiums have also been reduced up to 30%. This is part of last fall's Congressional action to provide disaster assistance for U.S. Agriculture. Contact your Crop Insurance Agent for additional details. ************************************************************************ MORE STORM CLOUDS, ON THE INTERNATIONAL FRONT??? I asked Desmond O'Rourke, Director of the WSU IMPACT Center, for a few comments on the international scene. As you are all aware, our dependence on export markets makes what's happening outside our borders so very important. Factors in the economies of the rest of the world will and can have strong impact on American Agriculture before the rest of the U.S. economy feels the pinch. I think his comments are very instructive and so have included them here. . . again, read on!!! Quoting Des (bold and italics are my additions), "On top of the Asian crisis, we now have a Russian collapse and grave risks in Latin America. Western Europe's economy is slowing. The U.S. has the only major economy that has not yet begun to slow. The IMF is now forecasting world output growth to slow to 2.5 percent in 1999; almost 2 percentage points below the IMF forecast before the Asian currency crisis began. Thus, just in 1999 alone, the aftermath of the Asian crisis will have cost the world economy about $700 billion in purchasing power. Just to indicate what that means, that sum would be close to the entire GNP of China for one year, or the combined GNPs of Canada and Mexico. If it runs its present course, before it is over, the crisis could have cost the world $3 trillion in lost purchasing power. In addition, there have been dramatic reductions in asset values, which have devastated governments and businesses. For example, real estate values in both Japan and Hong Kong are now at half their peak values. "Economists are currently betting that most of the Asian economies will bottom out some time in 1999. (Indonesia is a possible exception because of compounding political factors.) However, that is making the giant assumption that the latest Japanese recovery package (the tenth, I believe) will work when previous recovery packages did not; that the spreading bankruptcies of China's large trading companies will not slow China's economy, or force China to devalue and set off another round of retaliatory devaluations in Asia; that North America and Western Europe will remain growing markets for Asian exports (That will require sustaining economic growth and curbing projectionist sentiments in both Europe and North America); and that Taiwan and Singapore will not be dragged down by weak demand for their exports among their Asian neighbors. "Quite frankly, I see little hope for Russia. The Russians botched the transition from communism to capitalism and now have neither system working. In the process, much of Russia's most valuable assets were plundered. Without an honest government and restoration of the rule of law in business dealings, Russia can not establish an effective capitalist economy. Its leaders seem incapable of producing that result. "Brazil, once again, has flattered only to deceive in terms of achieving its potential as an economic power. It has not been able to press through the needed reforms before the latest currency crisis caught up with it. As the linchpin of Mercosur, the Latin American economic union, Brazil's problems will drag down other neighboring Latin American economies. Brazil's emergence as a growing market for many U.S. agricultural products is likely to come to a screeching halt. (Additionally, Brazil is likely to increase their corn, soybean, and wheat acreage - JN's comment) "Western Europe's economies are slowing, but still have sizable purchasing power. Unfortunately, because of the Common Agricultural Policy, they are more often competitors than markets for most PNW commodities, including wheat. Mexico and Canada were the bright spots in U.S. agricultural exports in the last two years, but with both economies slowing and currencies weak, they may not fill that role as well in the next two years. "I still think the biggest long-term problem for the U.S. economy is not saving social security or reducing the national debt but getting Asia and Latin America back on their feet more rapidly. This is particularly pertinent for Washington State where the fortunes of three of our major sectors, agriculture, aerospace and forestry ride up and down with the fate of Asia. Unfortunately, other issues have pushed Asia off the agenda in Washington, D.C. Agriculture, aerospace and forestry need to combine forces to try to get Asia back on the agenda... but time is running out." (end of Des's comments) *************************************************************************** PARTNERSHIPS: We are in challenging financial times. We do not know what is waiting around the corner for us. Healthy human relationships are critical for successful farm businesses. It is important always, but especially important in challenging times to have our relationships working smoothly. Financial pressures increase the opportunities for misunderstanding and disagreement. A bit of time spent keeping our relationships healthy is good business. Margaret Viebrock, an Extension Educator from Douglas County has written an excellent piece on keeping partnerships healthy. I offer it for your reading and use. Farm + Family = Partnership Farming has never been easy. Farmers just don't "grow things." Farming is both a business and a way of life. Farmers are concerned about the bottom line, but farming adds up to more than profits. A successful farm business requires a management style that encourages communication, positive attitudes and willingness to work together. Uncertain times, loss of income and the demands and pressures of farming increase the need for healthy partnerships. WHAT MAKES A HEALTHY PARTNERSHIP? Most farming operations have partnerships of some kind. It could be husband and wife, two brothers, brother and sister, dad, daughter or son or mom and grown children. Shared goals, values and dreams keep a partnership alive. Strong partnerships have conflicts and people argue, but they take the time to talk out their differences and share feelings to better understand each other. The older generation must be sufficiently wise and open-minded to recognize the younger generation's maturity and increasing ability. Grown children need to respect the person who is currently making the decisions or influencing the direction of the operation. The attitude toward the spouses involved in the partnership must be inclusive and genuine. Husband and wife partnerships require honest and open communication. Hearing only "part of the story" creates an anxiety that develops into lack of trust, hidden agendas, loss of support and emotional withdrawal. If you are interested in developing a more satisfying workable partnership, here are some signs of strength to use as guidelines. l Flexibility and the ability to compromise mean knowing when to agree and disagree. Keep short-term arguments in perspective. These will pass if not blown out of proportion. l The ability to communicate openly, honestly and genuinely with each other is paramount. Learn to listen with your heart as well as your ears. There is never a single winner in a discussion. Both of you either win more understanding or lose it completely. l Care enough to fight. Partners who are passionate about their differences stand a better chance of making the relationship work because they take the time to be forthright with each other. l Strong partners use shared decision making to set goals, plan together and work together. There is a strong sense of ownership for partnership success when similar values are shared. l A sense of humor is important to reduce tension, lessen anxiety and put people at ease. The ability to lighten up and let go can decrease stress. l Be a caring person. Be concerned about your partner's personal welfare as a human being. What might be happening in an extended family situation that needs special attention? Share in the excitement of family accomplishments or express empathy when a personal or professional problem arises. SPECIAL EDITION Late Breaking News! February 10, 1999 Conventional wisdom said the February 10, 1999 USDA World Agriculture Supply and Demand Estimate (WASDE) report would have no surprises - the January report had enough! I thought that simply reporting on the January 12th reports would do. Since our mail date coincided with the new Supply and Demand Report, I decided it would be good to just check the new report out before dropping the letter in the mail. OUCH! The February 10, 1999 USDA WASDE Report # 347 starts as follows. . . "WHEAT: PROJECTED U.S. 1998/99 ENDING STOCKS OF WHEAT ARE UP 80 MILLION BUSHELS FROM LAST MONTH . . ." This means ending stocks of U.S. wheat will total nearly 1 billion bushels. That is a lot of wheat! To be more exact, the projected number is 980 million bushels, up from the 900 million bushels in the January report - and I thought 950 million bushels . . . Nine hundred eighty million bushels will represent 41% of the wheat exported from the U.S. or used domestically this year. This means we will start next year with almost 40% of what will be needed to meet next years U.S. wheat demand before any of the 1999 crop is harvested!. The World's ending wheat stocks estimate was increased 2.5% to 127.91 million metric tons (mmt). To help put this number in perspective, the 1995/96 ending stocks were about 106 mmt, 96/97 ending stocks were 112.65 mmt, and a year ago the 97/98 ending stocks were 137.48 mmt. As stated in the newsletter, ending stocks will need to get below 115 mmt before the market gets nervous about adequate supplies of wheat. This will dampen the effects of weather scares and will place a negative aura over the market. The only bright spot in the report was a reduction of the corn stocks estimate. So what is the net effect? I spoke in my newsletter of a few glimmers of hope. While the trends I spoke of in the newsletter still hold, the wattage behind the glimmers just got lowered significantly. There is still hope if the new crop comes in way below last years production. If the market responds as expected to this news, spring wheat acreage should decline (although it is not clear what else Midwesterners might plant). So the advice to watch the market carefully for weather scares and related forward pricing opportunities still holds. The potential range of higher prices likely was lowered though. White wheat continues to look better than the other classes of wheat but the other classes will depress our opportunities. The picture worsened for hard spring wheat in this report as well. The supply and demand fundamentals would favor white spring wheat over DNS. Figure out a way to regularly receive the USDA Supply and Demand reports. They are free on the Internet (http://pnw-ag.wsu.edu) or cost $40/year by mail. Call my office and we will copy and send you the pertinent February report pages along with detailed information on how to get the reports regularly. February 10, 1999 USDA Supply and Demand Report – WASDE-347-Page 7 U.S. Wheat Supply and Use 1/ : : : 1998/99 Projections Item : 1996/97 : 1997/98 :======================= : : Est. : January February Area : Million acres Planted : 75.1 70.4 65.9 65.9 Harvested : 62.8 62.8 59.0 59.0 Yield per harvested : Bushels acre : 36.3 39.5 43.2 43.2 : Million bushels Beginning stocks : 376 444 722 722 Production : 2,277 2,481 2,550 2,550 Imports : 92 95 90 95 Supply, total : 2,746 3,020 3,363 3,368 Food : 891 917 925 925 Seed : 102 93 88 88 Feed and residual : 308 248 350 350 Domestic, total : 1,301 1,257 1,363 1,363 Exports : 1,001 1,040 1,100 1,025 Use, total : 2,302 2,297 2,463 2,388 Ending stocks : 444 722 900 980 STU = 41% CCC inventory : 93 94 95 125 Free stocks : 351 628 805 855 Avg. farm price($/bu)2/ : 4.30 3.38 2.65- 2.75 2.65- 2.75 ( A Stocks to Use ratio (STU) of 41% means we will have 41% of what is needed next year in the bin before any new crop is harvested!) U.S. Wheat by Class: Supply and Use Year beginning : Hard : Hard : Soft : : : June 1 : Winter : Spring : Red : White : Durum : Total 1997/98 (estimated) : Million bushels Beginning stocks : 143 166 45 59 31 444 Production : 1,098 491 472 332 88 2,481 Supply, total 3/ : 1,242 714 517 399 148 3,020 Domestic use : 577 254 257 104 65 1,257 Exports : 358 240 180 205 57 1,040 Use, total : 935 494 437 309 122 2,297 Ending stocks, total : 307 220 80 90 26 722 : 1998/99 (projected) : Beginning stocks : 307 220 80 90 26 722 Production : 1,182 487 443 298 141 2,550 Supply, total 3/ : 1,490 764 523 397 195 3,368 Domestic use : 604 264 298 111 87 1,363 Exports : 438 260 75 215 37 1,025 Use, total : 1,042 524 373 326 124 2,388 Ending stocks, total: February : 448 239 150 71 71 980 January : 393 217 150 70 69 900 ========================================================================= === Note: Totals may not add due to rounding.1/ Marketing year beginning June 1. 2/ Marketing-year weighted average price received by farmers. 3/ Includes imports. ************************************************************************* Jon Newkirk, Ph.D., Extension Economist WSU Cooperative Extension,210 W Broadway, Ritzville, WA 99169 (509)-659-3211 FAX (509) 659-3303 jnewkirk@coopext.cahe.wsu.edu ---------------------------------------------------------------- WSU Cooperative Extension programs and employment are available to all without discrimination. ----------------------------------------------------------------