May 29, 1998 Issue 17
Price Outlook Does Not Look Good.
This has been a hard newsletter to write. Prices are at very depressing levels. I kept hoping to be able to write some good news. - - I've just returned from a meeting with a number of marketing economists in the North Central region of the U.S. Few felt good about market prospects so negative feelings are pretty wide spread. All agreed, things could turn around quickly, but a Michigan State Economist did say in his view the fundamentals of the market "as we know them today" did not support present price levels. He felt prices could be lower!
Even though anything I say today (or any time) is highly speculative, I will give my thoughts on where I think prices are most likely to go. But remember, new information could come up next week or the month following (LET'S ALL HOPE TOGETHER!!) that would change it all. Each of you should make the time to keep informed on market conditions.
I think the odds are greater that wheat prices will continue to fall over the next 12 months than they are that prices will rise. I think there are more reasons to be pessimistic than optimistic about wheat prices. USDA on May 12 released their first predictions for the coming market year, which runs from June 1 1998 to May 31 of 1999. The May 12 USDA World Agricultural Board World Supply and Demand Estimate said, "The outlook for U.S. 1998/99 wheat is for a smaller crop, increased use, little change in ending stocks, but lower prices." USDA thinks the average farm gate price this year will be $0.15 lower than last and could be as much as $0.30 per bushel lower. They state clearly that their (USDA) estimate is of course highly speculative given that Northern Hemisphere wheat is far from harvest and Southern Hemisphere wheat isn't planted yet. (The GrowServ market page has a direct link to this report - http://pnw-ag.wsu.edu/.htm)
This year's ending stocks becomes next year's carry in and in the U.S. these stocks are large enough to continue to depress prices. U.S. ending wheat stocks on May 31, 1998 are estimated to be about 33.4% of the wheat that was either exported or used domestically in the US for food and feed in the previous 12 months. White wheat stocks will have increased 60% since May of '97 and on May 31 are estimated to be 92 million bushels or an amount equal to 28% of 1997 US white wheat production and 62% of last year's Washington white wheat production. USDA sees little change in these levels over the next 12 months but that estimate is based on increased demand.
And what about increased demand? USDA
in their May 12 estimate assumes demand for wheat will continue to increase
this next year. I'm not so sure. . . I asked Desmond
O'Rourke, Director of the WSU IMPACT Center and WSU Agricultural Economist
Des wrote, "I'm on the side of those who believe that there has been a fall in real demand worldwide. Until 1996, Asia's developing countries were driving the growth of world GDP and of demand.Their economies were already slowing in 1997 before the crash sent them spiraling downwards. Because of their relatively low incomes and large populations, e.g. in China and Indonesia, their high income elasticities of demand for food were a big factor in pulling up food demand in the 1980s and 1990s. The advanced countries of North America, Western Europe, Oceania and Japan have static populations, relatively high incomes and low income elasticities. They have not been a factor in increasing demand for food, and they cannot take up the slack for developing Asia. Who can? Latin America (but their economies are still fragile). Africa (It has the people, but not the incomes.) The Middle East (but oil prices are depressed). The former centrally planned countries. (Many are big grain producers. They lack incomes to increase imports). This, to me, is a sobering scenario."
Des continued,"A second thought. I get the IMF quarterly forecasts of world GDP. . .Their latest (May 1998) forecast shows a further downward revision to 3.1%. That is, the Asian crisis will pull down the world economy by 1.2% compared to what was expected before the crisis. This amounts to an annual decrease in world GDP of about $400 billion. This has to be another demand-reducing factor. And I would bet that the IMF will have to revise their numbers downward again before long."
And finally on the future in Asia, "One last sobering thought. Given the course of similar economic crises, I do not expect most of the Asian economies to get back on trend for imports of food until after the year 2000. Indonesia, South Korea and Thailand may take longer if they don't get their political situation sorted out soon. China faces huge problems externally in trying to compete with all the neighboring devalued currencies and internally with its debt-ridden state sector. Japan is expecting zero growth again in 1998. Their incremental approach to their problems has been good politics but bad economics. I think there is a 50/50 chance that both China and Japan will be dragged down by the Asian crisis."
There are other reasons to be pessimistic about wheat demand next year. A strong U.S. dollar works to our disadvantage by making our products more expensive. Also, since Asia is such a large part of the white wheat market it doesn't look optimistic to me for white wheat. If Pakistan responds to India's nuclear tests with tests of their own, there is a good chance a 70 million bushel PNW white wheat buyer will go elsewhere to buy their wheat. Even if U.S. grain were not embargoed, Pakistan could likely choose to go elsewhere to buy their grain (See a good Scott Yates, May 22 Capital Press article on this topic). About 25 percent of total white wheat exports from the PNW go to Pakistan.
One small hope for higher prices is the reduction of U.S. planted wheat acreage. This year wheat acreage is estimated to be 67 million acres down from 71 million acres last year although at this point, the USDA crop progress report actually shows a higher rating than a year ago. The reduction in U.S. wheat acreage is estimated to be 171 million bushels or 4.65 million metric tons (mmt). But we need to keep in mind that the world's ending stocks grew over 16 mmt last year. The size of all grain stocks, feed grains plus food grains, gives another faint reason for hope. Total world grain stocks remains below the 20% stocks to use level that the United Nations agencies consider a safe buffer. Corn stocks are at very tight levels. While the market is indicating corn prices will drop, any new crop reports of trouble in the Corn Belt would quickly provide some upward pressure on corn prices. Since wheat is a substitute for feed grains when feed grain prices rise too far above wheat prices, this may be our best hope for upward pressure on wheat prices. Tight corn stocks means that corn markets will be very sensitive to crop progress information.
As we consider the present situation and what and how long it will take for prices to return to profitable levels there are several things to keep in mind. Federal policy is significantly different now from any market driven crises of the past 60+ years. A key cornerstone of earlier U.S. policy was supply control. Today the US government no longer has ANY supply control tools left to use. Freedom to Farm officially and by law took USDA out of the supply control business.
In the past USDA also took large amounts of grain off the market during low price cycles. The "loan" rate placed a floor under the market price. Freedom to Farm officially and by law took USDA out of the grain storage business and stocks holding business. The Farmer Owned Reserve was eliminated. By law, USDA/CCC cannot hold stocks above the strategic reserve levels. Grain under the non-recourse marketing loan (about 10% of present stocks), if forfeited to USDA, will need to be placed on the market within a reasonably short time frame.
This is the first low price cycle in some time without deficiency payments. Deficiency payments as you all are aware, increased as prices went down. AMTA payments work very different from deficiency payments. AMTA payments are set and have no relationship to the market price. The danger is that with low prices it will be possible for farmers who have not taken the low prices into account in their planning to lose more money growing the crop than their contract payments will cover. AMTA payments will not keep you from losing money on your wheat crop. They may help cover those losses, but will not prevent losses associated with crop production and marketing.
The previous three paragraphs support my conclusion that the market will decide how low prices will go. And only when the market clears the present surpluses can we expect upward price pressure.
And finally, in the past Congress has passed ad-hoc disaster programs and often stepped in with special programs when things got tough. As I've said often, I do not expect Congress to make farm policy changes that would increase payments to farmers. Recently proposals have been floated to remove the marketing loan rate cap. Some have mentioned a $3.85 loan rate for wheat if the marketing loan rate cap were lifted. I do not think the proposal to remove the marketing loan rate cap has any chance getting by Congress. This proposal would require an increase in the U.S. budget if prices stay low. Any agricultural proposal that is not budget neutral will have a tough go in Congress. Additionally, it appears there is a less than 50-50 chance that marketing loans will be extended although the opposition is not so clear on this issue. There is strong opposition by the congressional leadership to any effort to reopen the 96 Farm Bill.
Prices will not stay down forever, thankfully, but the probability is high they will not rise significantly over the next year. Jim Hilker, a marketing economist at Michigan State University, publishes a neat web page at http://www.msu.edu/user/hilker/. He provides an updated wheat outlook each week. Additionally he uses a probability model to predict price ranges. A little study by a producer and I think his probability forecasts would be a good tool for risk management. For those of you on the Web, check out his Home Page.
Stay in touch with the market. Even though the fundamentals look very gloomy, if crop reports turn sour in either wheat or corn, prices could head higher although the likelihood is that it will take a major disaster for wheat prices to move up very much. Corn is very different from wheat because of very tight corn stocks and although things look gloomy there as well, any negative reports about corn production or positive demand reports will cause that market to change direction quickly and could pull wheat prices up a bit. My best advice is to plan and act as if the best case scenario is for wheat prices to stay about where they are with a more likely scenario for prices to drop further. Have a business plan prepared now for $2.50 locally priced wheat and even for $2.10 wheat. Take advantage of any upward price movement.
With the chance the posted county price (PCP) will be below the County USDA Marketing Loan Rate, the marketing loan may be a factor in marketing the 1998 crop. You will need to report your wheat acres by June 30, 1998 to your local FSA office for your 1998 crop to be eligible for a marketing loan or the marketing loan deficency payment. Check this program out carefully before June 30 to understand how this program might work for you if prices keep declining. I have a good explanation of the program from Kansas which I will be glad to copy for you if you call and request it.
In case you are thinking this messenger should be shot because of my message, this scheme of things is not what I would prefer. I'd far prefer prices to be at profitable levels. When I comment on today's policies and give you my assessment of what might happen, those comments do not reflect what I think should happen but what I think will happen. I personnally cannot change the world events and government policies that shape wheat markets. I believe strongly that those who will succeed in the present environment will change their business practices based on today's business climate with an eye on what tomorrow's reality will be and will not dwell on the past. I'm not arguing that you not work with your neighbors to try and change policies, but make sure that the first priority is to take care of those things over which you have direct control - your own business and marketing decisions.
And finally, I appreciate all the positive comments I have gotten from you. My goal is for this newsletter to provide information you can use in your business. With your feedback, I can make it better.
COST OF PRODUCTION WORKSHOP,
Desktop publishing and distribution by marge Schoessler,
§ Ph: 509 659-3211 § Fax: 509 659-3206 § e-mail: email@example.com
Member, WSU Cooperative Extension Ag Horizons Team
Styer - CRU