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Growers Ride the Wave Before Pulling Trigger by Scott A. Yates Capital Press, September 13, 2002

Going rates near $5 a bushel as world wheat crops plummet

SPOKANE -- "Wow!" No doubt Eric Odberg spoke for hundreds of other wheat growers throughout the Northwest when he uttered the one-word exclamation to describe his reaction to the recent upsurge in wheat prices.

It was only a month ago that soft white wheat prices topped $4 a bushel in Portland. Now, within the past couple of weeks they have gone on a run, flirting with the $5-a-bushel mark.

Part of the run-up in prices has to do with fears of drought in the United States, Canada and Australia. The situation is so bad in Canada that the Canadian Wheat Board has been forced to withdraw from some wheat export markets. Crop estimates there have been reduced from 20.6 million tons to 15.4 million tons.

In Australia, the forecast for the country's wheat crop is set between 15.5 million and 17.5 million tons. Last year the country produced 24.2 million tons.

Odberg has been surprised by how quickly prices have turned around. The Genesee, Idaho, farmer and president of the Idaho Grain Producers Association, said prices are going up so fast, the benchmarks he established to sell his crop are "kind of thrown out the window." He has sold 20 percent of his crop, but is taking a breather before selling any more.

"Even if it goes down 10 cents in one day, you're better off than you were a week ago. It's been four long years of depressed prices, and it's nice to see them back where they should be and where things are fun," he said.

But it's only fun if a farmer has a crop to sell. Many farmers in the Northwest, particularly in Oregon, had disastrous harvests. Phil Zurbrick harvest wasn't that bad, but the president of the Oregon Wheat Growers League said his yields came in a little below average.

Originally, he thought he would sell when Portland hit $4.50, which, when transportation is deducted, would put $4 a bushel in his pocket. Then the plan was to wait and see if prices got to $5 and sell some more.

"It's going up so rapidly, it went right by $4.50 and we didn't sell. We're going to wait until it slows down some before making the first sale," he said.

Pulling the trigger, as selling wheat is often called, can be a dangerous game. In 1997, growers lost millions of dollars in potential profit by waiting too long to sell into a declining market.

"There's this psychology of everyone wanting to top the market and not leave money on the table," said Jon Newkirk, Washington State University agricultural economist.

Newkirk said the price of wheat is rising not so much because of demand, but rather because buyers are worried about their supply. He wouldn't characterize them as being panicked yet. When that happens, prices will really escalate.

There are a couple of key ingredients separating worry from panic. One is whether there's enough moisture across the winter wheat-producing region of the United States to get next year's crop up and growing.

"There's plenty of wheat to meet this year's demand. The issue is, if we go into a second year, will there be enough wheat to meet demand?" he said.

The other unknown is the corn crop question. The U.S. Department of Agriculture has already dropped its projections on corn production. If the crop is really short, it means more wheat will move into feed channels, fueling prices even more.

The big unknown in the latest run-up in prices is the market for low-cost wheat from countries not ordinarily considered exporters. This is a new phenomenon and wasn't apart of the calculation during the latest bull market in wheat during the 1995-97 period.

Prices for wheat from countries that border the Black sea in Eastern Europe and from India are significantly lower than wheat from traditional growing areas. A report from the Foreign Agricultural Service of the USDA dated Aug. 2 reported that farmers in the Ukraine were producing wheat for $50 a metric ton. That's 1.36 a bushel.

Low production costs, the report said, enable traders to offset inefficiencies, like the higher cost of storage, transportation and other expenses.

Mike Krueger, editor of the White Wheat Report, agreed the cost of wheat from these alternative sellers is much lower, but he questioned the countries' capacity to move the grain.

"They have a much larger exportable surplus than capacity to load boats," he said, explaining that capacity out of Black Sea ports is booked through November.

Krueger believes panic has entered the market and described the past week as a "major consumptive panic." By historic standards, he said, milling quality stocks are tighter than they were in 1996. Coarse grains are tighter than they were in 1996, and rice is tighter than it was in 1996.

"When you think of the pricing that occurred then," we don't look crazy-high at all," he said.