Way out of daunting wheat situation

by Morton Sosland
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Even bakers benefiting from wheat flour prices the lowest most of them have ever experienced ought to be feeling a few qualms about the future of the wheat economy. After all, wheat prices first dipped to the lowest levels in years some months ago, causing the dramatic fall in flour costs, but also responsible for equally sharp falls in farmer income. Despondency is the condition that seems to have made its way through the wheat economy where little or no optimism rules about a recovery for prices anytime in the near term or even the distant future.

It does not require extensive evaluation to know that a situation like this cannot prevail forever. Yet, it is hard to cite anything in the near term that would change the outlook from prices weighted down by global wheat supplies exceeding demand, even looking at the latter in a totally positive way. This seems to be the case even as winter wheat plantings in the Northern Hemisphere have fallen from a year earlier as farmers decided that soybeans and corn offered prospective yields and income against costs at better levels than wheat. But the reductions in wheat area for harvest this summer along with forecasts of spring wheat plantings do little to point to crop cutbacks that would shrink supplies enough to be bullish.

Many parallel situations are found in studying other commodities, but for a number of reasons, it is the global crude oil market that is increasingly pointed to. Global oil prices have fallen to modern lows in the same way that wheat has. Especially striking is the present-day finding that producers of oil or of wheat and other grains have no choice but to maximize production even as unit prices fall short of returning costs. This conclusion reflects the fact that most oil producers and wheat growers have no revenue sources other than their land assets.

Even as this “produce or fail” policy makes grim economic sense, it is striking to realize how greatly these markets have changed from about 70 years ago. The difference for wheat, especially in the United States, is the post-World War II existence of price support programs that made the Commodity Credit Corp. the default owner of any wheat surplus. The C.C.C. could only sell at artificially high prices, in effect creating shortages. Anyone familiar with the oil market realizes that price weakness like currently ruling would in the past prompt O.P.E.C., led by Saudi Arabia, to slash production to raise prices.

This time the wheat market is without the sort of price support provided by the C.C.C. Instead, due to domestic political shifts and commitments in global trade agreements, the federal government has no authority or economic power to do anything like the C.C.C. While there is no reason to relate what is happening in U.S. wheat to Saudi policy on oil, comments by that country’s officials have cited their intention to rely on market forces to bring about the necessary correction in an oil supply-demand situation similar to what rules in wheat.

As tempting as it might be to throw up one’s hands in reacting to the situation like the one in global wheat and, yes, in oil, the power of the market to bring about a swift, unexpected correction should never be dismissed. Indeed, it would be exceptionally unwise to assume that the supply-demand excess will continue indefinitely. As one examines the global situation in wheat, recognizing how much of the surplus originates from countries in Russia’s orbit, the low level of prices cannot help but have an impact on production. Large crops forecast for 2016 depend on the unusual repeat of weather of the favorable kind experienced in most of the world for the past year and forecast for the months ahead. Like market-driven surprises, weather shocks may never be overlooked as the cause of radical change in the overwhelming global wheat situation.

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