Wheat market delivers message that must be heeded

by Morton Sosland
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While longstanding adages governing interpretations of markets have been tested in recent years, none has faced a tougher challenge than that posed by the performance of wheat prices in response to the disclosure earlier this month that plantings for this year’s crop were sharply below expectations. The adage, one of the first taught in grain-based foods, is "never argue with the market." Saying it another way, "the market is always right." In other words, it is folly to question a price move, regardless of how out of line it may seem with common sense. Thus, the fact that wheat futures declined the daily limit of 60 cents a bushel on the very day the U.S. Department of Agriculture revealed that acreage seeded to winter wheat for harvest this year was down 9 per cent came as near as possible to prompting students of wheat prices to wonder whether the inconceivable had happened, that the market was wrong.

Pundits were quick to offer explanations. For the most part, these centered on the market, rather than being bullishly influenced by the cutback in wheat acreage that was twice what many authorities had expected, had collapsed under an increase in the expected carryover, in both the United States and the world. Yet, it appeared ridiculous to tie that precipitous decline to a 32-million-bushel increase in the expected wheat carryover as compared to what had been projected a month earlier. After all, the market had already known that the carryover at the close of 2008-09 would be at least double what remained a year earlier. Adding 5 per cent to an already sharply increased ending stock could not cause limit plunges.

But it was not just wheat where ending stocks were projected to rise. A much sharper gain was indicated in the corn carryover, due mainly to an increase in estimated 2008 corn production and a decrease in estimated use in ethanol. The latter signaled continuing erosion in corn demand for making ethanol, which lessens the effect this exerts on wheat. When a further uptick in the soybean carryover is considered, it’s no longer possible to dismiss the revised carryover estimates as a force in wheat. After all, it was the sharp carryover reductions to history-making lows in the prior season that provided the boost to that season’s prices.

On top of the carryover gains, it is likely that the wheat market quickly understood that the dramatic fall in wheat plantings was a different story from what was immediately assumed. Indeed, hard red winter wheat acreage, down 4 per cent from a year earlier, was in line with expectations. Plantings of this class returned to the average of the previous decade, giving up only the sharp rise of a year earlier when growers were influenced by price advances in the last half of late 2007. This left soft red winter wheat as mainly accounting for the fall in total winter wheat acreage. Soft red dropped 26 per cent, to 8.29 million acres from 11.2 million in the preceding year. Even with this large reduction, soft red acreage was in line with recent averages and had been smaller in four of the past 10 years.

In seeking to uphold the market as reading these acreage figures accurately, it is equally important to assure that grain-based foods does not neglect the way these winter wheat plantings underscore the increasing flexibility of farmers in making acreage decisions. Disappointment with prices, as well as wet soils, explain why farmers decided to slash wheat acreage. But that would not have happened unless other crops were available promising superior returns. Each year it becomes increasingly evident that wheat is losing its sway over an expanding area where it once was dominant. Here the market is delivering a powerful message to grain-based foods that something needs doing to restore wheat’s winning ways as a crop of choice.

This article can also be found in the digital edition of Milling and Baking News, January 27, 2008, starting on Page 7. Click here to search that archive.

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