March 24, 2003
PRICES FOLLOW TYPICAL SHORT-CROP PATTERN
prices traded to the highest level in over five years in September 2002. December
2002 futures at Chicago traded to a high of $4.40, May 2003 futures reached $4.22,
and July 2003 futures established a high of $3.80. The sharp increase in prices
during the summer of 2002 reflected a large reduction in crop size in the U.S.
and other major wheat exporting countries. The 2002 U.S. crop was 17 percent smaller
than the 2001 crop, 28 percent smaller than the 2000 crop, and the smallest harvest
in 30 years. Production in other major exporting areas (European Union, Canada,
Australia, and Argentina) was down by 7 percent in 2002, with the largest decline
of 62 percent coming in Australia. Production in the EU was actually 13 percent
larger than the small crop of 2001.
over the past six months have unfolded in a classic short-crop pattern. From the
highs in early September 2002, May 2003 wheat futures declined steadily through
January 2003, mounted a small rally in February, and moved lower again in March.
At the close of trade on March 21, 2003, May futures were $1.36 below the contract
high. July 2003 futures traded in a similar pattern and at the close of trade
on March 21 were about $.93 below the contract high.
impact of the small crops in traditional exporting countries in 2002 was partially
offset by slightly larger production in traditional importing areas. Production
in those areas in 2002 was 0.7 percent larger than the 2001 crop, but 16 percent
larger than the 2000 crop. Much of that increase was in the former Soviet Union.
As a result, net wheat exports from that area are projected at 764 million bushels
this year, up from 378 million last year and zero two years ago. In addition,
production in other parts of the world, primarily India and Turkey, was up by
more than 4 percent in 2002.
Wheat production outside
of the U.S. was down only 0.7 percent in 2002. As a result, U.S. wheat exports
have been extremely disappointing during the 2002-03 marketing year. Those exports
are now projected at 875 million bushels, 86 million less than shipped last year.
At that level, U.S. exports will be at the lowest level in 31 years. Projected
U.S. wheat exports this year represent 23.4 percent of projected world exports.
That is in the range of the U.S. share of world exports over the past 6 years,
but is well off the 40 percent share of the 1970s and early 1980s.
USDA now projects that stocks of U.S. wheat at the end of the current marketing
year (May 31, 2003) will total only 465 million bushels. That is 312 million less
than stocks at the start of the year and would be the smallest year-ending inventory
in 6 years. However, that projection is 117 million bushels larger than projected
ion December 2002.
Disappointing U.S. exports and
prospects of more abundant year-ending stocks have allowed wheat prices to decline
sharply over the past 6 months. In addition, world wheat production is generally
expected to increase in 2003. That expectation is based on the assumption of a
return to more normal weather and yields in the U.S., Canada, and Australia and
on ideas that world wheat acreage may increase in response to the high wheat prices.
U.S. winter wheat producers reported a 6 percent (2.5 million acre) increase in
seedings for the 2003 harvest. The USDA's Prospective Plantings report to be released
on March 31 will reveal producer intentions for seeding spring wheat. Expectations
for that report are mixed. Higher wheat prices than those of a year ago would
suggest an increase in spring wheat seedings. However, some private sources are
anticipating a decline in spring wheat seedings due to the lower trend in prices
and some agronomic concerns. Instead, an increase in feed grain and/or oilseed
acreage in traditional spring wheat areas is expected.
acreage, of course, 2003 growing conditions and resulting average yield will be
a large determinant of price. Large areas of below-normal subsoil moisture conditions
exist in U.S. wheat growing areas. However, the National Weather Service outlook
for April, May, and June indicates near-normal precipitation and temperatures
for most growing areas. Smaller U.S. and world wheat inventories suggest that
wheat prices could become more volatile over the next few months. It will likely
take indications of another major shortfall in production, however, to reverse
the lower price trend.
In the short run, wheat prices
might be influenced by the magnitude of food aid from the U.S. and other countries
following the conflict in Iraq. It is believed that wheat could account for a
large portion of aid packages.