Milling & Baking News - November 4, 2008 - 7

Editorial

Being careful about wishing for wheat prices

s tempting as it may be to wish for continued baseline price forecast of $5.40 per bushel as the average
weakness in wheat, and thus a further lower- for the period from 2008 through 2017, and it assumes
ing of wheat flour costs, anyone so inclined production costs rising 2 per cent annually. Under a
is advised to consider how the market may have al- low-price scenario, the wheat price for the next decade
ready affected plantings this autumn for the 2009 crop would average $4.20 per bushel, while a high-price
as well as similar longer-range prospects. While this scenario would have wheat at $7. A high-cost scenario
admonition may seem overly conservative in light of involves annual 4 per cent advances.
experiences early in 2008 when wheat and flour prices
Various combinations of these price and cost scesoared to records, the apocryphal warning to be care- narios are examined. So far as the sharp value rise
ful about what one wishes for, comes into play here. It of the past year is concerned, the study finds it supdoesn't require much background to recall the 1980s ported by expected profits. Going forward, though,
farm collapse and how it set the foundation for the the low price scenario on wheat and the high cost
recent fall in wheat acreage. Further, these problems outlook would make wheat farming unprofitable.
were accentuated by brief farm prosperity in the early In the 1980s, prices fell a third from highs and pro1990s that was followed by
duction costs soared at an
Achieving the proper balance
another bust. These booms
annual rate of 5 per cent.
between market prices for the major The same happening curand busts for agriculture
have directly impacted the
rently in corn and soygrains and the cost of production
supply of wheat.
requires a combination of outcomes beans would slash profits,
In light of the perforbut would leave both crops
that is vastly different from recent
mance of wheat, corn and
profitable. The impact of
experience.
soybean prices in the past
such a development on
year or so, it is no surprise that farmland increased wheat would be magnified because "energy-based
dramatically in value, and that this has given rise to inputs - fertilizer, fuel, chemicals - account for
concern about another bust. After all, the collapse of a larger portion of variable production costs for
the housing and credit market, which is seen as classic wheat than for corn and soybeans."
bubble bursting, is often cited by those worrying about
In analyzing the risk of low wheat prices and high
farmland values. A study undertaken by the Federal production costs, the Federal Reserve warns that
Reserve Bank of Kansas City asks whether these val- farmers will not endure negative returns perpetually.
ues will keep booming. This question reflects a degree It says, "Producers would slash wheat production
of optimism stemming largely from the low level of and plant alternative crops, and the resulting decline
debt assumed by farmers in response to crop prices, in wheat supplies would boost wheat prices and supin contrast with earlier booms that saw debt growing port higher profit levels." It also notes that a situation
to exceed farmland values. While avoiding a forecast where wheat production costs exceed revenues would
of continuing boom in cropland, the study relies on cause downward pressure on the value of land used
the modest debt level and a stable price outlook to see to grow wheat. There is nothing favorable about such
current values maintained. That would also be a fa- an outcome. Yet, even contemplating these possibilivorable outcome for the wheat-based foods business.
ties underscores how important it is for grain-based
Achieving the proper balance between market prices foods to collaborate with producers in finding ways
for the major grains and the cost of production requires to reduce costs, such as the embrace of new seed and
a combination of outcomes that is vastly different from growing technology, as well as in building domestic
recent experience. In the case of wheat, the study uses a and global markets. MBN
MORTON SOSLAND, EDITOR-IN-CHIEF
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