USDA Wheat Baseline, 2013-22
Each year, USDA updates its 10-year projections of supply and utilization for major field crops grown in the United States, including wheat (see Overview of the USDA Baseline Process for more information). One key use of the projections is as a “baseline” from which to analyze the impacts of potential policy changes affecting U.S. agriculture.
This discussion summarizes analysis underlying the wheat projections for 2013-22. Details about projections for the U.S. macroeconomy, and other U.S. crops, U.S. livestock, farm income and food prices, and U.S. and global agricultural trade, which are critical components of this analysis, can be found in the Agricultural Baseline Projections topic page.
The U.S. wheat sector faces many long-term challenges:
- The long-term projections point to a smaller U.S. wheat planted area compared to recent years. The smaller area is a continuation of a long-term trend, as wheat’s profitability relative to other crops, particularly corn and soybeans, has declined.
- The sharp decline in U.S. domestic food use of wheat since 2000—arising from changing consumer preferences—appears to have ended. In the future, U.S. wheat consumption is projected to grow at the same rate as population.
- Internationally, in addition to traditional global competitors (Canada, Argentina, Australia, and the European Union), Russia, Kazakhstan, and Ukraine have emerged as new competitors, particularly in years when their production is high. The overall result in the projections is a smaller U.S. share of an expanding world wheat trade market.
The discussion is divided into five sections:
U.S. wheat planted area has trended down for many years, but the United States remains a major wheat producer. Several long-term factors contribute to expectations that U.S. wheat acreage will continue to decline. Nonetheless, the United States remains a major wheat-producing country, with output exceeded only by China, the European Union (EU-27), and India. In the United States, wheat ranks third among field crops in both planted acreage and value of production, behind corn and soybeans.
Policy changes have influenced U.S. wheat area. U.S. wheat area has varied widely during the past half-century, peaking in the early 1980s. Wheat area dropped off sharply in the mid-1980s, primarily because of relatively large Acreage Reduction Program (ARP) levels implemented when Government-owned stocks of wheat were very large. By 1987-88, the farmers who participated in this voluntary program to be eligible for commodity nonrecourse loans and deficiency payments had idled nearly 30 percent of the national wheat base acreage. Wheat area recovered in the late 1980s through mid-1990s as stocks declined and prices rose, thus lessening the need for ARPs. ARPs were eliminated under 1996 Farm Act, starting with the 1996 crop.
The introduction of full planting flexibility in the 1996 Farm Act enabled farmers to switch to alternative crops or to idle their land without affecting future program benefits. Planting flexibility increased competition for area among corn, oilseeds, and wheat, which put downward pressure on U.S. wheat acreage. Planted wheat area in the United States is down by about 30 percent from an average of 85 million acres in the early 1980s to an average of 57.2 million acres over the past 5 years.
Wheat area has dropped off in the United States as farmers have switched to alternative crops offering higher returns or taken their land out of production. Enrollment in the Conservation Reserve Program (CRP) is concentrated in those regions where wheat production predominates. About 55 percent of the land enrolled in the CRP is located in the Plains States, stretching from Texas to North Dakota and Montana. USDA estimates that 8 million acres of CRP land had been planted to wheat or in a wheat-fallow rotation prior to enrollment in the program.
Wheat land switched to other uses because of changing technologies. In the traditional wheat-growing areas of the Plains, there has been a trend since the early 1980s to reduce area fallowed by planting alternative crops and lengthening crop rotations. In addition to flexible timing, the planting of alternative crops, such as corn and soybeans, is facilitated by the increased use of reduced-till and no-till methods, which increase water storage in the soil, allowing for larger crop yields. For example, in western Kansas, the historical wheat/fallow rotation has been most commonly replaced by a rotation of wheat/grain sorghum/fallow in which wheat is planted one year out of three instead of one year out of two. Though cropping intensity increases, wheat is planted less frequently.
Movement of wheat acreage to row crops, such as corn and soybeans, on the Plains also reflects the rapid pace of genetic adaptations in these alternative crops. New varieties of corn and soybeans can be planted farther west and north in areas with drier conditions or shorter growing seasons. Plus, weed control is far easier with the development of herbicide-resistant corn and soybean varieties (see the Agricultural Biotechnology topic page for more information).
The pace of genetic improvement has been slower for wheat than for some other field crops, resulting in slower growth in wheat yields, which makes wheat a less attractive cropping option for many farmers. Genetic improvement for wheat has been slower because of genetic complexity and because of lower potential returns to commercial seed companies--factors that discourage investment in research. For instance, many wheat farmers, particularly in the Plains States, use saved seed from the previous year’s crop instead of buying from dealers every year. This practice sharply reduces the potential market for branded commercial seed wheat and, thus, investment in seed development research. In contrast, farmers have to buy seed corn each year because seed saved from a hybrid cannot be used for a subsequent crop. This situation creates a large annual market for seed companies to sell seed corn and generates the returns to investment needed to finance breeding programs to develop new varieties.
Wheat disease is also a factor. Concerns about wheat disease problems in the Northern Plains--particularly scab (head blight) in North Dakota and Minnesota—have influenced planting decisions since the 1990s and will continue to be a factor in the future. The increased incidence of this disease may stem in part from larger corn plantings and reduced tillage practices in traditional wheat areas in the Northern Plains. Both activities provide hosts for disease organisms.
Wheat’s share of planted area has declined in the Plains. The trend of planting more corn and soybeans on acreage traditionally planted to wheat can be illustrated by examining data for Kansas and North Dakota, the country’s two largest wheat-producing States. In the early 1980s, wheat accounted for 80-90 percent of the total wheat, corn, and soybeans planted in these States. In recent years, wheat’s share has dropped to about half of the total.
Ethanol expansion in the United States affects wheat and most other field crops. A large expansion in ethanol production has taken place in the United States, which has affected virtually every aspect of the field crops sector, ranging from domestic crop utilization and exports to prices and the allocation of acreage among crops. The primary ethanol feedstock in the United States is corn. Market adjustments to this increased corn demand extend well beyond the corn industry-- raising corn area, but also contributing to declines in wheat area.
The rate of expansion of ethanol production is expected to slow dramatically in the years ahead, so it should have only a modest further impact on acreage for wheat. The U.S. ethanol market has become mature as declining gasoline consumption limits the amount of ethanol that can be added to the finished gasoline supply--the so-called blend wall.
Just as U.S. wheat production faces pressures from multiple factors, several domestic and international market factors underlie long-term developments for U.S. wheat demand during 2013-22.
Decline in U.S. per capita flour use slows in recent years.
Per capita all-wheat flour use for 2012 is estimated at 134.4 pounds, up 1.9 pounds from the 2011 estimate but down 3.9 pounds from 2007, a recent peak.The 2012 per capita food use is down 11.9 pounds from its level in 2000 when flour use started dropping sharply, apparently as a result of increased consumer interest in low-carbohydrate diets.
Historical per capita flour use. For nearly 100 years, until the 1970s, per capita wheat use declined in the United States as diets became more diversified. Wheat use dropped from over 225 pounds per person in 1879 to a low of 110 pounds in 1972. By 1997, use had rebounded to 146.8 pounds per capita. The overall growth in per capita use that occurred between 1973 and 1997 reflected changes that included the boom in away-from-home eating, promotion of wheat flour and pasta products by industry organizations, and wider recognition of health benefits stemming from eating high-fiber, grain-based foods.
This growth ended around 2000 as a result of changing consumer preferences, including consumer interest in diets with fewer carbohydrates. Interest in these diets spiked in 2000, and the sharp drop in per capita flour use that began in 2000 seems to have ended.
Mill use efficiency improved with high prices in recent years. The flour extraction rate varies, in part, with the diligence with which mills are adjusted to optimize flour extraction and the plumpness of the grain kernels. The higher the price of wheat, the greater the economic benefit for managers to continuously adjust their mills to optimize the extraction rate. Plumpness is greater when the wheat crop is not stressed by moisture shortages during the grain filling production stage.
High rates of flour extraction mean that fewer bushels of wheat need to be milled to produce a given quantity of flour. At 76.3 percent, the 2011/12 rate was down slightly from the 76.9 percent rate for the 2010/11 marketing year. The extraction rate for the 3-year interval of 2008/09-2010/11 averaged 77.0 percent. These compare with the average monthly flour extraction rate from 1990/91 to 2007/08 of 74.6 percent--the highest marketing-year extraction rate over those years was 75.9 percent for 1996/97. The 1996/97 marketing year, like 2008/09 and 2009/10, was a year of high wheat prices.
Feed use varies. Feed use of wheat varies with price and crop quality. Feeding wheat to livestock increases when the price premium between wheat and corn is narrow, which typically occurs in the summer after winter wheat is harvested, but before corn is harvested. The price premium can also narrow when wheat quality is impaired. The resulting price discounts reduce wheat’s value relative to corn. For example, when there is excessive rainfall at harvest time, some wheat varieties are susceptible to preharvest sprouting. When sprouting occurs, biochemical changes in the wheat kernel diminish baking qualities for food products, making the wheat unsuitable for milling for food use, but still acceptable for livestock feed. Price discounts for sprout-damaged wheat facilitate its use as feed.
World market evolves. Longer term, growing global demand for wheat imports is concentrated in those developing countries where robust income and population growth underpin increases in demand. Such markets include Sub-Saharan Africa, Egypt, Pakistan, Algeria, Indonesia, the Philippines, and Brazil.
The number of major exporting countries that can supply these importers has expanded in recent years from the traditional exporters: the United States, Argentina, Australia, Canada, and the European Union. Ukraine, Russia, and Kazakhstan have become significant, but highly variable wheat exporters. These three Black Sea exporters together surpassed U.S. exports in 2009/10 and again in 2011/12 by 11.6 million metric tons (mmt) and 10.1 mmt, respectively. During the mid-1990s, their combined wheat exports were less than 5 mmt.
Low production costs and new investment in the agricultural sectors of the Black Sea region have enabled their world market share to climb despite the region’s highly variable weather, which affects area, yield, and production. In three of the past 4 years, these Black Sea exporters produced about 100 mmt. In 2010/11, drought reduced their output 68 mmt. These countries are projected to produce only 63 mmt in 2012/13 because of adverse weather conditions.
Future growth of wheat exports by Russia, though still rapid, is likely to be slower because of expanding pig and poultry sectors resulting from recent policy decisions to limit the country’s imports of poultry and pork products by increasing domestic production. More wheat is expected to be used domestically to supply the expanding livestock sector.
Competition from Ukraine, Russia, and Kazakhstan, as well as the traditional exporting countries, has resulted in a declining U.S. share of expanding world exports. Since 1981 and 1982 when U.S. wheat exports accounted for about 45 percent of world exports, the U.S. export share has has trended down, averaging about 20 percent over the last four years.
High U.S. wheat prices. In recent years, U.S. wheat prices have risen to unprecedented levels. This current price rise, which began in 2007, resembles the surge of wheat prices in the early 1970s that plateaued until this 2007 price move. Wheat prices fluctuated widely following the 1970s surge, but the lows during this period were always well above wheat prices prior to the 1970s. Importantly, the prices of other agricultural commodities also rose to new price plateaus. The causes of the 1970s price increase and the current price surge beginning in 2007 differed, but underlying each price rise was long-term higher demand for wheat and other commodities, including corn and soybeans.
For details on price surges see “Agricultural Commodity Price Spikes in the 1970s and 1990s: Valuable Lessons for Today” http://webarchives.cdlib.org/sw1vh5dg3r/http:/ers.usda.gov/AmberWaves/March09/Features/AgCommodityPrices.htm, “Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices” http://webarchives.cdlib.org/sw1vh5dg3r/http://ers.usda.gov/publications/wrs0801/, and “Why Have Food Commodity Prices Risen Again?” http://www.ers.usda.gov/publications/wrs-international-agriculture-and-trade-outlook/wrs1103.aspx#.UXf9C8pI1Ag.
Projections for U.S. Wheat Supply and Use
The long-term projections for 2013/14-2022/23 are heavily influenced by prospects for increased foreign competition in global markets and expectations for continued slow domestic yield gains. Both factors contribute to lower profitability than other domestic crops, thereby leading to reduced U.S. wheat area.
Projected supplies decline initially as smaller planted area reduces production. The reduced production at the beginning of the period is partially offset by rising carryin stocks and slightly higher imports. After the first 3 years, supplies are projected to fluctuate in a range of 2,936 to 2,965 million bushels.
Area and yield assumptions. Planted area for 2013 is projected at 57.5 million acres. This 2013 planted area is expected to be larger than 2012 because of better price incentives, including higher insurance-price guarantees.
The 10-year average harvested-to-planted ratio is 0.856. This ratio is used to calculate harvested area for all years in the projection period except for 2013. A slightly smaller ratio is assumed for 2013 because fall and early-winter drought conditions are expected to lead to larger-than-normal abandonment on the Central and Southern Plains in 2013.
The average wheat yield for 2013 is projected at 45.2 bushels per acre. This projected yield is based on historical trends beginning in 1985. The assumed annual increase in wheat yields is about 0.37 bushels per acre throughout the projection period, based on the same trend analysis of national wheat yields since 1985. By way of comparison, corn and soybean annual trend-yield gains are projected at nearly 2 bushels per acre and 0.45 bushels per acre, respectively.
See table: U.S. wheat long-term projections
Wheat plantings are expected to fall sharply early in the projection period. Wheat planted area is expected to fall sharply in the second and third year of the projection period to 51 million acres by 2015, a drop of 6.5 million acres from 2013. Planted area is then expected to decline more gradually over the rest of the period to 50 million acres, the lowest planted area since 1970. Plantings of wheat have fallen below 50 million acres in only 3 years since 1919, when USDA first began reporting planted area.
Expected net returns. Wheat planted area in the years after 2013 depends upon expected net returns compared with the expected returns of competing crops. For further information about this analysis see Supply Response Under the 1996 Farm Act and Implications for the U.S. Field Crops Sector (http://ideas.repec.org/p/ags/uerstb/33568.html).
Producer returns for wheat are much higher in 2012/13 than they were in 2011/12, $249 per acre versus $194, and this is partly why planted acreage is projected to increase by 2 million acres for 2013/14 above 2012/13. Wheat producer returns are expected to fall sharply for two years: $199 per acre in 2013/14 and $120 in 2014/15.
The components of the crop net returns calculation include yields, wheat price, and variable cost of production. As mentioned earlier, yields are assumed to grow at a steady, but slow pace throughout the projection period. Prices are expected to drop $1.80 per bushel from $7.20 at the start of the projections to a low of $5.40 in 2014/15. Projected wheat prices rise steadily from this low to $6.20 per bushel by the end of the period. The projected variable cost of production remains steady in the period’s first 3 years and then rises throughout the rest of the projection period.
With these projected yields, prices, and variable costs, wheat producer returns are expected to reverse direction in 2015/16 and rise steadily, but slowly, to $157 per acre over the remainder of the projection period. However, as discussed previously, wheat planted area is expected to decline slowly through the projection period with more favorable producer returns expected for competing crops.
An important competing crop for wheat is corn. Corn producer returns are higher than wheat and rise faster than wheat returns. Corn producer returns in 2014/15 are $329 per acre versus wheat’s $120. Further, corn’s returns rise 48 percent to $487 per acre by the end of the projection period. Wheat’s returns rise 31 percent to $157 per acre by the end of the period. Projected corn planted area rises steadily from 2015/16 through the rest of the period.
Wheat production is expected to decline after 2013 because of falling area, then rise slowly with higher yields. Projected production falls from 2,190 million bushels in 2013 to a low of 2,005 million bushels in 2015, as falling area more the offsets gradually rising yields. Expected production then slowly rises to 2,080 million bushels by 2022 with rising yields.
Production drops sharply, by 185 million bushels, in the first 2 years of the projection with the expected decline in planted area. With the slowing of the loss of wheat planted area thereafter, production partially recovers as yields rise over the period. By the end of the period, production is projected at 2,080 million bushels, 110 million bushels less than at the start of the projections.
Projected imports and ending stocks. Imports are projected to rise steadily until reaching 140 million bushels in 2017/18. Elimination of the Canadian Wheat Board’s state trading monopoly is expected to shift some of Canada’s wheat exports to the United States. Imports are held at this 140-million-bushel level through the rest of the projection period. Carryin stocks are projected to rise early in the period, increasing 100 million bushels between 2013/14 and 2015/16, as projected uses drop more than production.
Total wheat use is projected to drop sharply in 2013/14 and 2014/15, then increase slowly over the rest of the period. Total use is expected to drop from 2,438 million bushels in 2012/13 to 2,159 million bushels in 2014/15 because of projected decreases in exports and feed and residual use. Exports are projected down 175 million bushels and feed and residual use, down 115 million bushels by 2014/15.
The projected exports for 2014/15, at 925 million bushels, are the lowest over the whole projection period. Exports are projected to begin rising slowly after 2014/15, to 940 million bushels in 2017/18. Projected exports are held at 940 million bushels for the rest of the period. The decline of U.S. wheat exports over the projections reduces U.S. share of global wheat trade from 19.2 percent to 15.6 percent. For the same time period, Russia’s market share is projected to rise from 10.7 percent to 15.4 percent, nearly equal to that projected for the United States.
Domestic use is projected to decline with an expected decrease in feed and residual use--from 250 million bushels in 2013/14--that is expected to level off at 190 million bushels in 2015/16 and to hold at this level for the rest of the projection period. Domestic use from 2015/16 to the end of the period is projected to grow as population growth drives food use higher. Per capita food use of wheat holds constant over the projection period. The projected prices are high enough that continued high extraction rates are expected over the projection period.
Ending stocks remain high through the projections. Ending stocks peak at 804 million bushels in 2014/15, then drop steadily to a low of 737 million bushels in 2019/20, before rebounding slightly. In comparison, in 2007/08, the year of worldwide wheat shortages, U.S. ending stocks were only 306 million bushels, the lowest since the mid-1940s.
Wheat prices remain historically high.
Wheat prices are projected to drop by $1.80 per bushel in 2014/15 from $7.20 in 2013/14 as falling exports and feed and residual use lead to the highest ending stocks of the 10-year projection. Wheat prices then slowly rise from $5.40 per bushel to $6.20 at the end of the period. This general rise in wheat prices is supported by (1) rising corn prices and profitability that reduce wheat area, constraining wheat production, and (2) the declining U.S. wheat stocks-to-use ratio. The wheat price to corn price ratio falls from 1.33 in 2013/14 to 1.28 at the end of the projections.
Projections for World Wheat Trade
The USDA baseline also provides projections for global trends in wheat trade. The following discussion on wheat trade is from Global Agricultural Trade chapter of the Agricultural Baseline Projections topic page.
World wheat imports to grow. World wheat trade (including flour) is projected to expand by 22 million tons (16 percent) between 2013/14 and 2022/23, rising to nearly 164 million tons. Growth in wheat imports is concentrated in those developing countries where income and population gains drive increases in demand. The largest growth markets include Indonesia and other Asian countries, Egypt, Saudi Arabia, the 15 countries of the Economic Community of West African States, other Sub-Saharan Africa countries, and other countries in the North Africa and Middle East region.
- Globally, per capita use of wheat is projected to decline slightly. In many developing countries, almost no change in per capita wheat consumption is expected, but imports are projected to expand modestly because of population growth and limited potential to expand wheat production. As incomes rise in Indonesia, Vietnam, and some other Asian countries, consumers are expected to shift marginally from rice to wheat.
- Egypt is expected to remain the world’s largest wheat-importing country, with imports climbing to 12 million tons by 2022. Imports by Indonesia are projected grow rapidly to 8.6 million tons, and that country replaces Brazil as the second-largest importing country.
- Imports by both Vietnam and Bangladesh are projected to rise rapidly, increasing by a total of 2.1 million tons. Partially offsetting this increase are projected lower imports by Japan and South Korea.
- Imports by countries in Africa and the Middle East are projected to rise nearly 12 million tons and account for 53 percent of the total increase in world wheat trade. Saudi Arabia has adopted a policy to phase out wheat production by 2016 because of water scarcity concerns, and as a result, imports are projected to rise to 3.4 million tons by 2022/23.
- Historically, India has been a big wheat importer in some years and a big exporter in other years. In the past two years, India has exported significant amounts of wheat, partially as a result of high price-support policies and excess Government stocks. These policies are expected to continue in some form, although exports are projected to decline during the coming decade.
World wheat exporter competition to increase. The traditional five largest wheat exporters (the United States, Australia, the EU, Argentina, and Canada) are projected to account for about 60 percent of world trade in 2022, compared with nearly 70 percent during the last decade. This decrease in share is mostly due to increased exports from the Black Sea area.
- U.S. wheat exports are projected to decline from nearly 30 million tons in 2012/13 to just over 25 million tons at the end of the projection period. U.S. exports are projected to account for less than 16 percent of global wheat trade at the end of the projection period, down from about 22 percent in the past 5 years.
- Canada’s wheat area is projected to continue to decline slowly in response to increased global demand and more favorable returns for vegetable oils (especially rapeseed oil). As a result, little change is projected for Canadian wheat exports. Eliminating the Canadian Wheat Board’s state trading monopoly is assumed to result in redirection of some Canada’s exports to the United States because of logistical considerations.
- In Argentina, some of the area formerly planted to wheat is expected to shift to barley in response to Government policies and increased use of barley for double-cropping in crop rotation practices. Exports are expected to rebound in 2013 and 2014 after production shortfalls the previous 2 years, but then gradually decline during the rest of the projection period.
- The EU is the only traditional exporter whose market share is projected to increase. After dropping sharply in 2011 and 2012, EU wheat exports are projected to trend upward and reach 25 million tons by 2022, well above the levels of the last decade.
- The strong upward trend in wheat exports from Russia, Ukraine, and Kazakhstan was interrupted by droughts in 2010 and 2012. However, exports from these countries are expected to recover and rise more than 55 percent, climbing to nearly 50 million tons by 2022 and accounting for about 80 percent of the projected increase in world wheat trade. Increasing domestic feed use is expected to prevent even more rapid export growth. Although not explicitly reflected in the projections, continued year-to-year volatility in production and trade is likely because of the region’s highly variable weather and yields.
Market Forces Constrain Growth in U.S. Wheat Sector
The U.S. wheat sector is facing long-term challenges as productivity gains and producer returns for competing field crops outpace those for wheat. Over the next 10 years, the planted area of U.S. wheat is projected to fall sharply. Wheat yield enhancements are expected to continue lagging those for competing row crops, primarily corn and soybeans. U.S. exports are expected to stagnate with the increased trade competition, particularly from Russia, Ukraine, and Kazakhstan. Furthermore, domestic food use, although growing, no longer provides the dynamic market growth experienced from the 1970s through the mid-1990s. Consequently, farmers are expected to focus on other crops, such as corn and soybeans, which are projected to provide better returns than wheat.