USDA Wheat Baseline, 2015-24
Each year, USDA updates its 10-year projections of supply, utilization, and prices 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 2015-24. Details about projections for the U.S. macroeconomy, other U.S. crops, U.S. livestock, farm income, and U.S. and global agricultural trade 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 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 per capita food use of wheat since 2000—arising from changing consumer preferences—appears to have ended, or at least, slowed. In the future, U.S. total wheat consumption is assumed to grow at the same rate as the population.
- Internationally, in addition to traditional global competitors (Canada, Argentina, Australia, and the European Union), Russia, Kazakhstan, and Ukraine have emerged as new competitors. 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, 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, farmers who participated in this voluntary program to be eligible for commodity nonrecourse loans and deficiency payments[pasmith1] had idled nearly 30 percent of the national wheat base acreage. Wheat area recovered in the late 1980s through the mid-1990s as stocks declined and prices rose, thus lessening the need for ARPs. ARPs were eliminated under the 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 (beyond program idling) 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 84 million acres in the early 1980s to an average of 55 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) http://www.fsa.usda.gov/FSA/webapp?area=home&subject=copr&topic=crp is concentrated in those regions where wheat production predominates. About 84 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 about 7 million acres of current 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 fallowed area 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 and allow 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 and pest control is far easier with the development of herbicide-tolerant corn and soybean varieties and insect resistant corn 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 because cross-pollination leads to the loss of hybrid vigor. 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 diseases 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 percent to 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 this three-crop total.
Ethanol expansion in the United States affects wheat and most other field crops. The large expansion in ethanol production that took place in the United States has affected virtually every aspect of the field crops sector, 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 and contributing to declines in wheat area. The rate of expansion of ethanol production has slowed dramatically since 2011 and future growth is expected to be limited, so it should have only a modest further impact on acreage for wheat.
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 2015-24.
Annual flour use. The following chart shows historical annual flour production in the United States from the late 1980s. Flour production trended up from the late 1980s to 2000, and then dropped sharply in 2001 and 2002. This reduced flour production reflects the drop in per capita flour consumption that will be explained following a discussion of the impact of the current high flour extraction rate.
Wheat grain food use. Total domestic food use of wheat for 2013/14, at 951 million bushels, was up 6 million bushels from 2012/13. Food use of wheat increased in 2013/14 with slightly higher per capita flour use and rising population. However, the impact of this higher flour demand for wheat to be milled was partially offset by continued high flour-extraction rates.
The flour extraction rate in a particular year varies partly with the plumpness of the grain kernels and partly with the diligence with which mills optimize flour extraction. Plumpness is greater when the wheat crop is not stressed by moisture shortages or high temperatures during the grain-filling production stage. With the very high wheat prices in recent years, there is a greater incentive for mill managers to frequently adjust their mills to maximize flour extraction.
High rates of flour extraction mean that fewer bushels of wheat need to be milled to produce a given quantity of flour. In calendar year 2013, the extraction rate was a very high 77.3 percent. The annual extraction rate shown in the chart above can be split into two periods for analysis, 1988 to 2007 and 2008 to 2013. The average extraction rate for the earlier period is 74.6 percent, significantly lower than the average of 76.8 percent for the later period. The higher extraction in the 2008 to 2013 period reflects, in part, the impact of the high wheat prices for these years compared to the earlier years in the figure. One year in the earlier period with a high extraction rate, 1997, was also a year of higher than average wheat prices.
Per capita flour use. Per capita all-wheat flour use for calendar year 2013 is estimated at 134.7 pounds, up 0.3 pounds from the 2012 estimate but down 3.6 pounds from 2007, a recent peak.The 2013 per capita food use is down 11.6 pounds from the 2000 level when flour use started dropping sharply, likely due to increased consumer interest in low-carbohydrate diets.
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 the 1880s to a low of 110 pounds in 1972. By 1997, use had rebounded to 146.8 pounds per capita. From the early 1970s until the late 1990s, U.S. wheat producers could count on rising per capita food use to expand the domestic market for their crop. The growth of the domestic market during this time period reflected changes that included the boom in away-from-home eating, the desire of consumers for greater variety and more convenience in food products, promotion of wheat flour and pasta products by industry organizations, and wider recognition of the health benefits of eating high-fiber, grain-based foods.
With the reduced per-capita demand for wheat flour since 2000, total flour production dropped and older, less efficient mills were closed. Besides high wheat prices discussed earlier, the flour extraction rate has also been boosted in recent years because of these changes in the milling industry following the 2000 downturn in the per capita demand for wheat-flour products. The following chart shows the decline in both the number of mills and daily milling capacity after 2000. Milling capacity began to rise after 2005 despite a continued decline in the total number of mills. New, larger, more efficient mills were being opened. These mills, with their improved technology, made it easier to maintain high extraction rates.
Feed use varies. Feed use of wheat varies with price and crop quality. Feeding wheat to livestock increases seasonally when the wheat-price premium between wheat and corn is narrow, this typically occurs in the summer, after winter wheat is harvested but before corn is harvested. Wheat feeding was especially high in the summer of 2012 as tight corn supplies related to the historic 2012 summer drought pushed corn prices above those for wheat in many areas for several months.
The price premium can also narrow, or even trade at a discount, when wheat quality is impaired. The price discounts reflect wheat’s reduced 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 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 EU). Ukraine, Russia, and Kazakhstan have become significant wheat exporters but the amounts of wheat exported by each country per year are variable, mostly because of adverse weather conditions affecting the crop health before harvest. These three Black Sea exporters together surpassed U.S. exports in 2009/10, 2011/12, and again in 2013/14, by 11.6 million metric tons (mmt), 10.0 mmt, and 4.8 mmt respectively. They are on track to surpass the U.S. export level again in 2014/15. 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 past 5 years, the production of these Black Sea exporters ranged from 63 mmt in 2013 to 101 mmt in 2011.
Future growth of wheat exports by Russia, though still rapid, is likely to be slower because of expanding hog/pork and poultry sectors resulting from policies to limit the country’s imports of poultry and pork products. 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 trended down, averaging about 19 percent over the last 3 years.
High U.S. wheat prices. In recent years, U.S. wheat prices have risen to unprecedented levels. This recent price rise, which began in 2007, resembles the surge of wheat prices in the early 1970s. 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 recent price surge 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,” “Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices,” and “Why Have Food Commodity Prices Risen Again?”
Projections for U.S. Wheat Supply and Use
Long-term projections for U.S. wheat for 2015/16-2024/25 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 for wheat than for other domestic crops, thereby leading to reduced U.S. wheat area, as shown in an earlier graph.
Projected supplies. Supplies drop nearly 20 million bushels in 2016/17, as lower area reduces production, and then another 15 million bushels in 2017/18 with both lower area and beginning stocks. Beginning stocks are down because of the drop in area the previous year. Wheat supplies then steadily increase through the remainder of the projection period. Supplies increase with steadily rising imports and higher yields increase production.
Area and yield assumptions. Planted area for 2015 is projected at 56 million acres, down slightly from 2014. Spring wheat planted area is expected up from 2014, especially durum because of high durum prices. Winter wheat planted area is expected down, primarily because the late harvest of row crop last fall slowed wheat seeding.
Wheat planted area is expected to fall a total of 4.3 million acres from the 2014 wheat planted area in the first 3 years of the projection. Wheat planted area then falls another 1.0 million acres by 2024, the end of the projection. The 10-year average harvested-to-planted ratio of 0.847 is used to project harvested area.
The average wheat yield for 2015 is projected at 45.5 bushels per harvested acre. This yield level is adjusted down from the trend yield because of the expected decline in 2015 planted area for the higher-yielding soft red winter wheat crop. The assumed annual increase in wheat yields is 0.37 bushels per acre throughout the projection period, based on trend analysis of national wheat yields since 1985. With this assumed annual yield increase, the national wheat yield is 3.7 bushels per acre higher than in 2015 by the end of the projection period. For comparison, average soybean yields rise 4.2 bushels per acre over the projection period and average corn yields are projected to rise 18.1 bushels per acre by 2024.
See table: U.S. wheat long-term projections
Expected net returns. Wheat planted area in the years after 2015 depends upon expected wheat net returns compared with those for competing crops. For information about acreage responses to relative prices, see Supply Response Under the 1996 Farm Act and Implications for the U.S. Field Crops Sector.
Producer returns over variable costs for wheat are expected to decline in the first 2 years of the projection and then stabilize for the remainder of the period to 2024/25. This pattern reflects the projected national season average price (SAP) for wheat. The projected wheat SAP is expected to be lower than in recent years, but above the highs following the price spike in the early 1970s.
Wheat production is expected to increase with rising yields after the initial drop in planted area. Projected production is expected rise 90 million bushels from a low of 2,075 million bushels in 2016 to 2,165 million bushels in 2024. This increase in production is due to steadily rising yields more than offsetting a loss of wheat planted acres.
Projected imports and beginning stocks. Imports are projected to rise steadily from 150 million bushels to almost 200 million bushels in 2024/25. Carryin stocks stabilize in a 655-million--to-665 million bushel range after some initial fluctuations.
Total wheat use is projected to rise over the projection with steadily rising food use and exports. Total use is expected to rise sharply in the first year of the projection with the recovery of exports from 2014/15 and continue to increase with steadily higher food use and exports. Feed and residual use increases toward the end of the period with the expected increase in supplies due to higher yields and growing imports. Total projected domestic uses exceed exports throughout the projection.
Flour demand is expected to rise with the growth of population with the assumption of steady per capita consumption. However, flour extraction rates are expected to remain high with relatively strong prices and the newly constructed, more efficient mills, thus limiting the growth of wheat grained milled.
Projected U.S. wheat exports rise steadily throughout the period, rising from 1,020 million bushels to 1,065 million bushels (or 27.7 mmt to 29.0 mmt). Nonetheless, the U.S. share of world wheat trade declines because increased competition particularly from Russia whose exports are projected to rise from 19.2 mmt to 27.5 mmt by the end of the projection period. The U.S. share of world trade is projected to fall from 17.8 percent in 2015/16 to 16.1 percent by 2024/25.
Ending stocks stabilize after an initial decline. Carrying stocks stabilize in a 655-million-to-665 million bushel range after some initial sharp fluctuations. The stocks-to-use ratio is 31.1 percent in the first year of the projection and declines slightly in most years, ending at 28.4 percent.
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 the Agricultural Trade chapter of the Agricultural Baseline Projections.
See table: Wheat trade long-term projections
Annual world wheat trade (including flour) is projected to expand by nearly 24.5 million tons (16 percent) between 2015/16 and 2024/25, reaching 180 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 the 15 countries of the Economic Community of West African States, other Sub-Saharan Africa countries, Egypt, other countries in the North Africa and the Middle East region, Indonesia, and Pakistan.
- 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 domestic wheat production. As incomes rise in Indonesia, Vietnam, and some other Asian countries, demand for wheat-based instant noodles and bakery products increases.
- Egypt and Indonesia remain the world’s largest wheat-importing countries, with annual imports climbing to about 10.5 million tons in each country by 2024/25. Imports by Indonesia grow rapidly as increased consumption of wheat-based instant noodles continues. Brazil is the third largest wheat importing country, projected at 7.7 million tons by 2024/25.
- Imports by China, Vietnam, Thailand, Bangladesh, and the Philippines are all projected to rise rapidly, with the annual total for these countries increasing by 4.8 million tons. Imports are driven by rising incomes and populations, with consumption becoming diversified with urbanization. China, for instance has increasing demand for higher quality wheat used in bakery and specialty products, catering to higher incomes households.
- Wheat imports by countries in Africa and the Middle East increase by 10.4 million tons over the projection period and account for 43 percent of the total increase in world wheat trade. In this region, only Iran has projected decreases in imports. Saudi Arabia has adopted a policy to phase out wheat production by 2016 because of water scarcity. Saudi Arabia’s annual imports are projected to increase to 4 million tons by 2024/25.
Historically, India has been a large wheat importer in some years and a large exporter in others. In the 2012/13 and 2013/14, India exported significant amounts of wheat, partially as a result of price-support policies and accumulation of government stocks. Although India’s wheat stocks have fallen from their peak, India is expected to be a net wheat exporter over the projection period, shipping 2.5 to 2.7 million tons annually.
The five largest traditional wheat exporters (United States, Australia, EU, Argentina, and Canada) are projected to account for 62 percent of world trade in 2024/25, compared with about 70 percent during the last decade. This decrease in share is mostly due to increased exports from the FSU, which account for a projected 27 percent of world trade in 2024/25.
- U.S. wheat exports are projected to rise slowly but steadily from 27.7 million tons to 29 million tons during the coming decade. However, the U.S. share of world exports declines over the projection period, from 17.8 percent in 2015/16 to 16.1 percent in 2024/25.
- Wheat exports from Russia, Ukraine, and Kazakhstan have recovered from droughts in 2010 and 2012. Exports from these countries have increased nearly threefold from the recent lows in 2010/11 and are expected to climb to 49 million tons by 2024/25, accounting for nearly half of the projected increase in world wheat trade. Rising domestic feed use prevents even more rapid export growth. Although not explicitly reflected in the projections, year-to-year volatility in FSU wheat production and trade is likely because of the region’s highly variable weather and yields.
- Canada’s wheat area declines slowly in response to more favorable returns for canola. As a result, little change is projected for Canadian wheat exports. Eliminating the Canadian Wheat Board’s state trading monopoly is assumed to redirect of some of Canada’s wheat exports to the United States due to transportation and market considerations.
- In Argentina, total area devoted to wheat remains roughly unchanged although some area traditionally planted with wheat shifts to barley in response to government policies and increased double-cropping of barley. Exports rebound from low levels in 2012/13 and 2013/14, with little growth after 2016/17.
- The EU is the only traditional wheat exporter whose market share is projected to increase, rising from 18 to 20 percent. EU wheat exports are projected to trend upward and surpass 35 million tons by 2024/25, as less wheat is fed to livestock due to relatively low feed grain prices.
Market Forces Constrain Future Growth in U.S. Wheat Sector
The U.S. wheat sector is facing long-term challenges as yield gains and producer returns for competing field crops outpace those for wheat. Over the next 10 years, planted area of U.S. wheat is projected to fall. Wheat yield gains are expected to continue to lag those for competing row crops, primarily corn and soybeans. U.S. exports are expected to show limited growth 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.