The winter wheat condition has improved slightly from the previous crop progress reports but remains at a historical low. The wheat crop is facing an uphill battle due to the prolonged drought, the late establishment from scattered rains in early November for some, and spotty stands throughout much of the winter wheat growing region. The insurance target price of $8.79 attracted an 11% increase in wheat acreage despite the poor planting conditions.
High-end yield potential may be limited due to the dry soil conditions, but there is still opportunity for the U.S. to maintain trend-line yields.
The fall of 2012 was the last time wheat conditions were similar to the most recent crop progress report. In fact, the drought monitor had 11.5% more acreage in the extreme and exceptional drought areas on January 15, 2013. Even with the bleak conditions in the fall of 2012 and winter of 2013, the 2013 wheat harvest turned out better than expected with a trend-line yield of 47.3 bu/ac thanks in part to a few timely rains in the spring of 2013 and the resiliency of wheat.
Chart 1 shows the lack of correlation between the final crop progress report of the year, Week 47, and the winter wheat yield the following summer. The data shows that it is still too early to know with certainty how the winter wheat crop will turn out.
Many farmers held back on fertilizer this fall, taking a wait-and-see approach. As we approach the season for top-dressing wheat, farmers will need to decide if their wheat has enough yield potential to justify additional fertilizer. This decision can be a catch 22 as most farmers locked in a profitable crop at planting due to the high insurance price, but additional expenses can erode their profitability. On the other hand, if farmers chose not to fertilize with the intent of preserving their insurance profitability, they may miss out on yields above their insurance guarantee and attractive prices.
If the wheat belt receives adequate moisture this fall and winter it should give poorly established wheat a chance to become better established with new seedlings and tillers that will help restore production potential, despite the poor start. Expect farmers to top-dress nitrogen in the late winter to aid in root and tiller development prior to aggressive growth in the spring if the moisture situation improves.
U.S. wheat challenges aren’t alone, however, which should help support wheat prices. Of the top seven exporters – which make up 81% of global wheat exports – four are facing production and export challenges. Globally, the top seven wheat exporters are Russia 24%, Canada 12%, U.S. 12%, France 10%, Ukraine 9%, Australia 7% and Argentina 6%. The Russia and Ukraine war continue to deteriorate production and export capabilities from both countries. Argentina is facing a prolonged drought. It is likely that Argentina wheat production and exports could reach the lowest level in eight years.
On the U.S. wheat demand side of the equation, things aren’t quite as rosy. Exports are at their lowest levels since the 1971-72 marketing year. There are a number of factors influencing the weak export numbers, but the underlying problem is that U.S. wheat is too expensive due to our high wheat price, strong currency value, and tight ending stocks. Continued global instability has sustained a strong USD versus other currencies. U.S. wheat acreage has been on a decline since 2014. This reduction in production has kept our ending stocks tight even though exports are at their lowest level in 50 years.
Wheat prices in 2023 will be very sensitive to global production and export issues coming out of major wheat exporters. If the U.S. wheat growing region is to stay in a drought through the spring and the Russia-Ukraine conflict escalates, expect wheat prices to rebound. More importantly though, keep your cost of production in mind and make profitable sales when the opportunity arises. Eight-dollar wheat will generate positive returns for most farms, so keep the long game in mind when marketing your new crop wheat.
Terrain content is an exclusive offering of American AgCredit, Farm Credit Services of America and Frontier Farm Credit.