The average price of wheat in the current marketing year will take a nearly 50% jump from the prior all time high of $4.55. USDA’s projected range for all wheat in the marketing year that ends in May will be $6.45 to $6.85 per bushel. Over the past 30 years wheat has only averaged $3.33 per bushel. So what has suddenly overtaken the wheat market, even pushing futures for certain varieties above the $20 mark in Minneapolis?

The Minneapolis issue seems to be a trading problem and is entirely different from the supply and demand scenarios that have consumed the world wheat market. But the goings-on at the Minneapolis Grain Exchange are indicative of the fervor that has pushed wheat prices higher. In response to Congressional inquiries about the wheat market, the Congressional Research Service has summarized the issues. (This document is not yet available on the Internet.) CRS analyst Randy Schnepf outlined several factors that have contributed to the higher wheat prices that began in 2007.

Major producing countries. Many of the nations that typically supply the world’s wheat demand began having crop shortages late in 2006. Following the Australian drought, an Easter time freeze in the US, and heavy rains in Europe cut the quality and quantity. Then in the summer, the northern crops in Canada and the Ukraine were also found to be short because of adverse weather.

Limited exports. Early in 2007 some countries began halting sales to foreign buyers, and Europe halted the practice of subsidizing its exports to get rid of surplus wheat. Late in 2007 the only exportable supplies of wheat were in the US and Russia, but they were tight.

Strong demand. With the world demand up and supply down, buyers were coming to the US with orders for wheat unseen for more than 30 years. Even though wheat prices and ocean freight costs were up sales were strong, to both wealthy and developing countries. The typical decline in US wheat exports that occurs in the spring did not occur and monthly sales exceeded the prior month. By last August and September wheat prices had reached record levels, but so had export volumes.

Low stocks. By July, global stocks are expected to reach a 30 year low, while consumption continues to exceed production. And the three decade US trend of fewer acres will contribute to the least carryover in 61 years.

Price premiums. Because of shortages of milling wheat, prices for wheat with 13% to 15% protein have risen faster than standard protein wheat. Additionally, USDA’s wheat seedings report in early January indicating acreage was under market expectations. That ignited interest in owning wheat, as well as sending a message for more spring wheat acreage. Futures contracts for hard spring wheat reached $24 at the Minneapolis Grain Exchange a week ago in unprecedented trading activity. Prices have also risen for other preferred varieties as buyers search for limited supplies.

Competing for acres. US wheat acres have declined for the past 40 years because of higher revenue potential from other crops. Even short season corn and soybeans have forced wheat out of the Northern Plains, and the spread of ethanol plants has continued to increase the value of corn where it can be grown.

2008 outlook. High commodity prices will encourage planting expansion. USDA is expecting wheat acreage up 6%, soybeans up 12%, and corn down by 4% from 2007. With normal weather, wheat production could rise by 13%, and globally wheat plantings are expected to increase. If that is the case, demand for US wheat will decline as world stockpiles are rebuilt, as will be US supplies. That means prices will decline from their recent highs, but are expected to remain in the $4-$5 range over the next five to ten years.

Domestic food price impact. 2007 saw food prices increase by 4% due to higher commodity and oil prices, and the forecast for 2008 is another 3%-4% more. Products made primarily with wheat are rising slightly faster. This situation is causing inflation fears to rise, but most economists are blaming oil prices as the primary cause.

International food price impact. Countries dependent upon food imports are at a greater risk of higher food costs, but the impact depends on how much consumers typically spend on food out of their income. In the US that is about 10%, but low income consumers will spend higher amounts, and in importing countries that problem is magnified. Humanitarian groups have been expressing concerns about that issue. Typically, US food aid programs might be of assistance, but because the federal budget fixes dollar amounts, purchases for export donations will be limited.

Summary:
Poor crops, short supplies, and strong demand have caused the wheat market to scream to higher price levels than ever before. Domestic and foreign wheat acreage is expected to increase this year, helping to rebuild stocks and that will soften the prices. In the meantime domestic and foreign food prices have risen, particularly those made primarily of wheat and food deficit nations have had to spend a lot more money for food than would normally be expected.