Prospects analyzed for wheat prices in 'new era'

by Morton Sosland
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Even an experienced wordsmith has difficulty in describing with accuracy just how flour users look on the current level of wheat prices. Yes, of course, there is widespread relief that prices have fallen precipitously, by around a third, from record-setting levels ruling last March. That fall, though, is probably not appreciated by companies that might have booked some part of their forward requirements when markets appeared to be on an ever upward spiral. Similarly, any satisfaction about waiting out the market is diminished by persistent volatility that makes covering needs for even a brief time ahead a difficult enterprise. Sure, it is smart to cover at moments of extreme weakness, but this sort of sensible approach is often overwhelmed not just by the market but by realizing that wheat prices remain above historical average levels.

Recent studies lean to confirming that what happened to wheat and other grains in recent years is the forerunner of a "new era" of grain prices. This "new era" theory is most effectively expressed by two economists, Darrel Good and Scott Irwin, on the staff of the Department of Agricultural and Consumer Economics at the University of Illinois at Urbana-Champaign. In support of this theory, they note the behavior of prices in two post-World War II periods, from January 1947 through December 1972 and then from January 1973 through November 2006. "Unfolding evidence suggests," they say, "that prices are likely establishing a higher average than experienced in recent history."

Citing this historical record, the Illinois economists point out the average monthly price for wheat rose from $1.81 in 1947-72 to $3.24 in 1973-2006. Corn gained from $1.28 to $2.42, and soybeans went from $2.63 to $6.15. These upturns, of 79 per cent for wheat, 89 per cent for corn, and 134 per cent for soybeans, reflect in their differences the way new uses, refining and ethanol for corn, and food, industrial and feed for soybeans, play a role. Thus, the wheat-corn price ratio declined from 1.41 to 1.34, accounting for much of wheat acreage decline.

In looking to what may be in store in the "new era," they focus on the consequence of a repetition of the same percentage increases. These new averages would be $5.60 per bushel for wheat, against $3.24 in 1973-2006, $4.60 for corn and $14.40 for soybeans. Not so incidentally, that would lower the wheat-corn ratio to 1.26, boosting the attraction of the feed grain.

The Illinois report also examines likely prices in the first five years of the "new era" if the pattern is repeated. Using only the first five-year range of the 1973-2006 period, the study cites a potential wheat range between $3.30 and $10.15. That is amazingly near the range actually experienced in the December 2006-July 2008 period, which was from $3.97 to $10.40. The average monthly wheat price in that period was $6.09, which is 49 cents above the projection for the entire "new era."

In looking at the reasonableness of these projections, the Illinois economists make the case that the course of both wheat and soybean prices is dependent on corn, and that corn prices will continue to be closely related to energy. "The other two crops will have to be competitive with the price of corn," they declare, in making a point that also must be central to the thinking of a wheat flour user. "At the margin," they note, "the simplest way to think about corn prices is the value of corn to the ethanol producer. To a large extent, the value of corn is a function of the price of gasoline." Thus, the key to corn prices is the price of crude oil, and it may not be out of line also to say that the prices for wheat and of wheat flour are going to be determined largely by the price of crude oil.

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