Mark Welch, Texas AgriLife Extension grain marketing economist, says it’s a good time to be in the grain business.
Even with current price declines brought on by burdensome supplies, Welch sees a continuing trend for growing demand for wheat and other grains well into the future as populations grow and consumers look to improve diets.
He cites population growth of 1 percent per year and “no indication that the trend will be backing off. We’ve seen an increase in grain consumption over the last few years. Demand for grain is strong in the world and in the United Sates,” he told participants at the recent Big Country Wheat Conference in Abilene. Current low prices may be “short-term.”
Projections for May 31, 2015 indicate a 100-day supply of wheat on hand. “That’s a comfortable supply,” Welch said, “not tight but not burdensome.” Corn supply is expected to be at 71 days, also comfortable. Soybeans at a 110-day supply will be ‘an all-time record high but large stocks are held by China and market response is limited.
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“Rice is worrisome,” he said. “Stocks are building but next year stocks tip down a little.”
Welch said the United States retains a competitive advantage in the export market, primarily because of our reputation as a consistent producer and for our superior wheat quality.”
Competitors include Canada, Australia and Russia, and key import markets include the Mideast, Africa and Southeast Asia.
“China has a large crop; Brazil has a large crop and usually buys wheat from Argentina. Argentina’s crop was down so Brazil had to come to the United States. Short-term, that was an advantage, but with a better Argentine crop, Brazil will buy less from us.
The U.S. wheat industry needs to be more competitive, Welch said, to maintain or gain market share. “We need to get our production costs down. Our climate is getting hotter and drier so we face a challenge to continue maintaining our reliability and quality.”
Even with a growing population and increased demand, U.S. producers need to reduce production costs without sacrificing yield and quality. He compared U.S. production to countries of the Former Soviet Union. “Yields are increasing in both places,” he said. U.S, average wheat production is 45 bushels per acre; the FSU countries average 30 bushels per acre.
“They have a higher degree of production variability, but occasionally they will have a good production year and come in and challenge for market share.”
Current downward price pressure, Welch said, has little relation to production in the United Sates. “Production here has changed little but production for other countries has increased. The European Union is getting larger and larger and China and the FSU have also increased production.”
Vying for markets
As populations increase, top wheat producers will vie for those growing markets. Welch said Nigeria, for instance, will see population grow to near 1 billion in the next 80 years. “That’s a huge export market.”
And tapping that potential will mean lowering production costs. “We need to be the low-cost producer,” Welch said. That means U.S. wheat farmers will have to rotate, develop and plant better varieties; practice conservation tillage; use more soil and plant testing; adopt precision application technology; and develop and follow a marketing plan.
“Prices will fall back to the cost of production,” from highs,” he said. “We have to compete; we have to become more efficient.”
He said current low prices may seem significant compared to recent highs. “The June 2015 projected price is $1 per bushel lower than the price last June. That’s the negative correlation between the U.S. price and the size of the world wheat crop.”
Feed use for wheat is also down as the U.S. corn crop is expected to be the largest in 35 years. “But even with the big price drop, wheat prices are not far below average over the last seven years.”
Longer-term, Welch says, wheat and other grains offer farmers good profit opportunities—if they improve efficiency and marketing savvy.