World Grain - December 2008 - 6

from the editor-in-chief

Care needed when basking
in lower wheat prices

s tempting as it may be for all involved in milling and food processing
to express unmitigated pleasure with
weak wheat prices, anyone so inclined ought
to consider how the declines have already
affected plantings for the 2009 crop as well
as longer-range production prospects. While
such warnings might seem unnecessarily
cautious in light of the horrific experiences
early in 2008 when wheat soared to record
highs, the apocryphal warning to be careful
about what one wishes for comes into play
here. It doesn't require much background to
recall the 1980s farm collapse and how it set
the stage for the recent fall in wheat acreage
in both developed and developing regions.
Further, these problems were accentuated by
a brief spurt of farm prosperity in the 1990s
that was followed by another bust.
In light of the performance of wheat, corn
and soybean prices in the past year or so, it is
no surprise that cropland in many countries
has increased dramatically in value, and that
this has given rise to concern about another
bust. After all, the collapse of housing and
credit markets, which is seen as classic bubble bursting, is often cited by those worrying
about farmland. A study undertaken by the
Federal Reserve Bank of Kansas City examines whether these values will keep booming. This question reflects a degree of optimism stemming largely from the low level

WOR LD GRAIK
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Morton I. Sosland
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of debt assumed by farmers in response to
crop prices, in contrast to earlier booms that
saw debt increasing to exceed farmland values. While avoiding a forecast of continuing
booms, the study relies on the modest debt
level and a stable price outlook to see current
values maintained. That would also be a favorable outcome for the global wheat-based
foods business.
Achieving proper balance between market
prices for the major grains and the cost of
production requires a combination of outcomes that differs from recent experience. In
the case of wheat, the Federal Reserve study
uses a baseline price forecast of $5.40 per
bushel ($201 per tonne) as the average for
the period from 2008 through 2017, and it
assumes production costs rising 2% annually.
Under a low-price scenario, the wheat price
for the next decade would average $4.20 per
bushel ($157 per tonne), while a high-price
scenario would have wheat at $7 ($261 per
tonne). A high-cost scenario involves annual
4% advances.
Various combinations of these price and
cost scenarios are examined. So far as the
sharp value rise of the past year is concerned,
the study finds it supported by expected profits. Going forward, though, the low price
scenario on wheat and the high cost outlook
would make wheat farming unprofitable. In
the 1980s, prices fell a third from highs and

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production costs soared at an annual rate of
5%. The same happening currently in corn
and soybeans would slash profits but would
leave both crops profitable. The impact
of such a development on wheat would be
magnified because "energy-based inputs -
fertilizer, fuel, chemicals - account for a
larger portion of variable production costs
for wheat than for corn and soybeans."
In analyzing the risk of both low wheat
prices and high production costs, the Federal Reserve warns that farmers will not
endure negative returns perpetually. It says,
"Producers would slash wheat production
and plant alternative crops, and the resulting
decline in wheat supplies would boost wheat
prices and support higher profit levels." It
also notes that a situation where wheat production costs exceed revenues would cause
downward pressure on the value of land used
to grow wheat. There is nothing favorable
about such an outcome. Yet, even contemplating these possibilities underscores the
importance of grain-based foods companies
around the world collaborating with producers in finding ways to reduce costs, such as
embracing new seed and growing technology, as well as building domestic and global
markets for wheat foods.
Morton I. Sosland
Editor-in-Chief

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