High Plains Ag Week 2-7-2022 – Wheat Market Update

Wheat farmers are facing higher wheat prices than in previous years and higher production costs.  Today, Pancho Abello gives us a winter market update on wheat. Which are the local and worldwide drivers to consider? How is La Niña impacting wheat production?

Dates and Deadlines

2/8/2022 – Input Impact Conference, Canyon, TX

2/16, 3/2* 2022 – Profitability Spreadsheet Conferences, Lubbock, TX., *Plainview, TX.

2/23, 3/9/2022 – North Region Production Education Online

3/2/2022 – Spring Ag Seminar, Clay County.

What We’re Reading

Producer Input-Impact Conference set Feb. 8 in Canyon – AgriLife Today

Barbecue demand remains strong despite high meat prices – AgriLife Today

Optimism, higher cattle prices to start 2022 – Southwest Farm Press

U.S. Fertilizer Prices Drop Again, Easing Pressure on Farmers – Bloomberg

Check out this joint series between Texas A&M and Oklahoma state agricultural economists, published in Southwest Farm Press, on the economic prospects for the upcoming year in agriculture

• U. S. economic outlook and agricultural implications for 2022 
• Build Back Better: What’s in it for ag?
• 2022 ag trade: uncertainties coupled with record numbers
• Credit conditions strong, but caution ahead
• Input prices will squeeze margins in 2022
• Cotton market outlook for 2022 
• 2022 feed grain outlook 
• A dream year in the wheat market, almost

Wheat Market Update – ARC/PLC

Wheat prices continue to show significant volatility and remain higher than in recent years (Graph 1).  Locally, the weather and low-level ending stocks are driving the wheat market today.  Worldwide, higher consumption levels, overall higher commodity prices, and geopolitical turbulences might also affect the market.  Producers are still facing higher production costs that have reduced their margins and increased their breakeven prices and risk to unprecedented levels.  Further, the probability of triggering PLC or ARC payments is very low this year.  A good risk management plan is essential!

Graph 1. KC HRW July Contract. Source: CME Group.

La Niña Weather Event

As we mentioned in October, the effect of the La Nina weather event is playing a significant role in market price this year, given the low level of ending stocks.  Texas crop conditions rated poor and very poor increased these last months to 76 percent (Graph 2).  The last time we had these bad crop conditions was in 2006.  The Texas average yield for 2006 was the lowest in the previous 30 years (Mark Welch, Wheat Outlook).

Graph 2. Texas Winter Wheat Conditions. Source – USDA Crop Progress.

The Early-January 2021 CPC/IRI Official Probabilistic ENSO Forecast forecasted a Niña until approximate springtime (Graph 3).  The Nina weather event forecast less rainfall in the Rolling Plains and most winter wheat areas from the U.S.  This drought also affects Argentina and some areas of Brazil, which can decrease corn production in that area, supporting prices for feed grains.

Graph 3. Early-January 2021 CPC/IRI Official Probabilistic ENSO Forecast

Drought conditions in most wheat areas have progressed during the last months.  In October 2021, the winter wheat area under drought conditions was about 44% in the U.S.  USDA’s latest report from February 1st shows 69% of the winter wheat area under drought (Graph 4).  For winter wheat, drought conditions in the U.S. are still playing a significant role in the market for the next season.

Graph 4. Winter Wheat Areas in Drought (USDA).

U.S. Supply and Demand – Low Ending Stocks

U.S. wheat production and acreage have been declining for many years.  During these last two years, ending stock have sharply declined up to 628 mil bu.

Graph 5. U.S. Wheat Use, 1-12-2022. USDA – WASDE

USDA Long Term projection from November 2021 estimated an increase in acreage of approximately 5% from last year.  Assuming a higher percentage acreage harvested in the U.S. (83%), USDA exports projection of 925 mil bu., and a higher average yield of 49.1 bu/acre, projected ending stocks will still be tight by the end of next season (Table 1).   Given this weather pattern, there are high chances to see lower ending stocks next season due to lower harvested acreage or lower yields.

Table 1. Projected 2022/23 Ending Stocks.

Worldwide market drivers.

World wheat demand has increased at a higher level than production.  Last year, the U.S., Russia, and Canada spring wheat production was lower than expected, which led to the rally in wheat prices.  Ending stocks are lower than in previous years.  However, ending stocks worldwide did not decline as sharply as U.S. ending stocks.  Overall, world production has been higher (Table 2).

Table 2. World Wheat Demand and Supply. USDA, FAS, PSD January 2022.

In season winter wheat conditions are favorable worldwide except for the U.S.  The Niña weather event affects crop production in Argentina and southern Brazil, which can decrease corn production in that area, supporting prices for all feed grains (Graph 6).

Graph 6. Crop Synthesis Conditions. Source: Global Agriculture Monitoring – GEOGLAM.

The USDA reported world prices lower than U.S. and Canadian wheat prices (Graph 7).  Our competitors’ FOB wheat market prices have shown significantly lower prices since June of 2021.

Graph 7: International Daily FOB Export Bids. Source: USDA- Grain: World Markets and Trade

Higher world wheat consumption levels and higher commodity prices will support higher wheat prices.  Further, geopolitical turbulences, as we have seen with Russia and Ukraine, might add more volatility to the market, potentially affecting U.S. exports.  On the other hand, higher worldwide production and lower wheat prices from our competitors might decrease U.S. exports and put a ceiling on wheat prices.

Expected ARC-PLC Payments.

The chances of triggering ARC PLC payments this year are very low.  The reference price of wheat ($5.5/bu) is much lower than the expected next season.  The probability of having a marketing year average price less than $5.5/bu is low right now.

The average wheat price to generate and ARC payment should be less than $4.7/bu, given 2022 guaranteed revenue for Districts 1 and 3 (Table 3).  The table below also shows the expected drop in yields required to trigger an ARC payment, depending on different market prices.  For example, for an average market price of $6/bu, yields should be 79% lower than the 2022 benchmark yield for your county.  For market prices of $7.15/bu, yield should drop below 66% of the 2022 benchmark county yield.  Similarly, for a price of $8/bu, the yield should be lower than 59%.

Table 3. ARC-CO Estimated District Summary

 

The Agricultural & Food Policy Center at Texas A&M University has developed a 2022 ARC-CO/PLC Decision Aid (https://www.afpc.tamu.edu). This decision aid will help you understand how your choices under the 2018 Farm Bill may affect your FSA payment based on your decisions and farm history. 

What can we expect for next season?

The risk of lower wheat production in the U.S. due to lower yields and lower corn production in the southern hemisphere supports high prices level. Total U.S. production will depend on the final acreage planted this year, including spring wheat.

Fertilizer and input prices have also increased for the 2022 season, tightened expected margins, and increased breakeven prices, as previously discussed. But most importantly, high inputs costs have increased the risk we are taking.  Today’s market prices allow us to hedge for those high input prices we are locking up this year.   A good marketing plan should be in place this year!