Wheat Prices Soar on Export Demand

One commodity that has been quietly but steadily rising in price for many months is wheat. Prices for all types of wheat, including soft red winter, hard red winter, spring, white, and durum, are all now at record levels and are likely to continue to rise. Unlike corn, wheat's price increase is not caused by a high-profile demand source such as ethanol. In fact, world demand for wheat is probably best described as "steady."

The main factor driving up wheat prices is production problems in the rest of the world. World wheat production is geographically diversified, with many countries growing and exporting a significant amount of wheat. Over the past couple of years, many of these countries have suffered weather-related production problems. In fact, much of the current price spike is due to the fall in world wheat stocks that occurred in the 2006/07 marketing year.

Although world wheat production is actually expected to increase in 2007 compared with 2006, crop problems abound. Many European Union countries have experienced problems with rain, freezing temperatures, and/or drought. The Canadian crop got off to a good start, but production potential has been curtailed by a hot, dry summer. Australia is enduring a drought. Russia and Ukraine experienced early-season problems, but the crop has improved.

In the meantime, the U.S. crop is expected to be 6.5% larger in 2007, with generally decent yields. Exports of the 2007 crop are off to a fast start, due to steady world demand and lack of exportable supplies in the previously mentioned countries. Nearly two months into the current marketing year, U.S. wheat exports are 40% higher than last year and outstanding sales (purchases committed but not yet shipped) are nearly triple last year's level. The combined level of outstanding sales and shipped grain is roughly twice last year's level at this time. The torrid export pace is the main reason for the recent spike in U.S. prices.

Taking a long-term view, U.S. wheat production is slipping as farmers switch to other crops, especially corn and soybeans. Gains in wheat yields have not kept pace with those of corn and soybeans. The change in government farm policy in 1996 made it easier for farmers who historically had planted wheat to shift to other crops. High prices for wheat could lead to some increase in wheat acreage in 2008, but gains will be limited by demand-driven high prices for soybeans, corn, and other feed grains.