High Wheat Prices: What Are the Issues?

High Wheat Prices: What Are the Issues?
Randy Schnepf
Specialist in Agricultural Policy
Resources, Science, and Industry Division
Summary
The U.S. Department of Agriculture (USDA) projects the U.S. season-average farm
price (SAFP) received for all wheat in the 2007/08 marketing year (June to May) to be
in the $6.45 to $6.85 per bushel range. The range midpoint exceeds the previous U.S.
record of $4.55 (in 1995/96) by 46%. During the past 30 years, the all-wheat SAFP has
stayed within a range of $2.42 to $4.55, while averaging $3.33 per bushel. USDA
projects a replenishment of U.S. and global supplies in 2008 (assuming normal weather
conditions) to moderate market prices in the latter half of 2008. However, prices are
likely to exhibit substantial variability until global stock levels can be rebuilt.
The initial impetus for rising prices over the past year has been a 30-year low in
global stocks following seven out of eight years in which global consumption exceeded
production. However, in recent months several other factors — including reluctance of
traditional exporters to make further supplies available to international markets, strong
international demand, the rapid growth in the demand for grains and oilseeds as
feedstock for biofuels production, and USDA’s announcement that last fall’s winter-
wheat plantings were less than expected — have contributed to a sharp rise in cash and
futures contract prices, particularly for higher-protein wheat varieties. This report will
be updated as events warrant.
Background
Wheat is grown in almost every temperate-zone country of North America, Europe,
Asia, and South America. The largest wheat-producing countries are China, India, the
United States, Russia, Canada, and Australia. U.S. wheat production accounts for about
9%-10% of world production; but the United States is the world’s leading wheat exporter
with roughly a 25% share of annual world trade. However, the international wheat market
is very competitive and foreign sales often hinge on wheat variety and product
characteristics as well as price.¹

¹ CRS Report RL33204, Price Determination in Agricultural Commodity Markets: A Primer, by
(continued...)

U.S. wheat is produced as both a winter and a spring crop.² The United States
produces all six of the world’s major wheat classes — hard red winter (HRW), hard red
spring (HRS), soft red winter (SRW), hard white, soft white, and durum. Hard wheats
generally contain higher protein levels — a desirable trait for bread making, while softer
wheats may be preferable for making noodles, crackers, and pastries. Durum wheat is
ground into a coarse flour called semolina that is used for making pastas. In local
markets, the demand for a particular wheat class (and quality) relative to its nearby supply
will determine local prices. Traditional, higher-protein wheats command a premium over
lower-protein varieties, often referred to as the “protein premium” (Figure 1). However,
linkages to national and global markets bring additional factors — such as transportation
costs, competitors’ supplies, and foreign demand — into play in determining the price of
a particular wheat type and quality.
Figure 1. U.S. Cash Prices Wheat is the principal food grain
by Major Wheat Classgrown in the United States; however, a
¹⁴^S^o^{ft W}^hⁱ^t^e^W^h^e^a^{t #}¹^,^P^o^r^t^l^aⁿ^dsubstantial portion (8%-10%) of the
^D^N^S¹⁴^%^,^Mⁱⁿⁿ^e^a^po^lⁱ^s^HR^W^,^#¹^O^r^d^,^Ka^ns^a^s^Cⁱ^tyannual U.S. wheat crop is used as a feed
¹¹^S^o^f^t^R^e^d^W^h^eat,^#²^,^C^hⁱ^c^ag^ograin. As a result, wheat must compete
with other cereals for a place at the
⁸consumer’s dinner table, while also vying
⁵with coarse grains and other feedstuffs in
livestock feed markets. Almost half of
²the U.S. wheat crop is exported annually,
²⁰⁰⁰²⁰⁰²²⁰⁰⁴²⁰⁰⁶²⁰⁰⁸although the importance of exports varies
^S^o^u^r^c^e^:^U^S^D^A^,^E^R^S^,^W^h^e^a^t^B^rⁱ^e^fⁱⁿ^g^R^o^o^m^D^a^t^a^,^F^e^b^r^u^a^r^y^{, 2}⁰⁰⁸^.by class of wheat. White wheat and HRS
wheat rely more than other wheat classes
on sales into export markets. The larger
the share of exports to production, the
greater the vulnerability to international market forces.
In the U.S. domestic market, flour millers are the major users of wheat, milling about³
24% of annual wheat production into flour since 2000. In most cases, a wheat buyer at
a flour mill will “source” wheat by general location and primary quality attributes such
as protein quantity and quality (i.e., gluten share) and baking performance. Price
premiums and/or discounts reflecting quality differences often develop and can also
influence buyer preferences. Other major wheat processors include breakfast food, pet
food, and feed manufacturers. Wheat may be used directly in feed rations when alternate
feedstuffs are lacking or when production-related quality damage makes the wheat
unmarketable as a food. Wheat milling by-products such as bran, shorts, and middlings
are also used by feed manufacturers in the production of animal feeds.

¹ (...continued)
Randy Schnepf.
² For current data and information on U.S. and world wheat production, use, trade, and
government policy, see USDA, Economic Research Service (ERS), Wheat Briefing Room,
available at [http://www.ers.usda.gov/Briefing/Wheat/].
³ CRS calculations based on data from Wheat Situation and Outlook Yearbook, WHS-2007,
USDA, ERS, March 2007.

Key Factors Contributing to Higher Wheat Prices in 2007⁴
Poor Harvests in Many Major Wheat-Producing Countries. Early in 2007,
estimates of Australia’s wheat production and exports were reduced because of severe
drought in 2006. Then, late-spring freeze damage in the United States and heavy rains at
harvest in the United States and Western Europe reduced the output and quality of wheat.
Next, dry weather hurt crops in Eastern Europe and some countries of the former Soviet
Union. Drought in southeastern Europe reduced that area’s wheat and corn crops, forcing
livestock producers in the European Union (EU) to import wheat and feed grains for feed
rations. By midsummer, it became apparent that Canada and the Ukraine would reap
smaller wheat crops because of poor weather conditions.
Limited Export Supplies. The production shortfalls curtailed exports from most
traditional wheat exporters. In the spring of 2007, both Ukraine and Argentina initiated
export restrictions in efforts to control food price inflation. The Ukraine imposed a ban
on wheat exports and Argentina stopped issuing export registrations, which significantly
slowed export sales during the rest of the year. Although the EU was able to export wheat
without export subsidies, shipments out of the EU slowed sharply by late summer as
wheat increasingly replaced corn used for feed. By early fall, only the United States,
Russia, and Kazakhstan had large volumes of wheat available for export. Recently
Kazakhstan officials have said that they also intend on slowing their country’s wheat⁵
export pace (via higher custom duties) due to declining supplies.
Strong International Demand. Projected tight U.S. supplies, combined with
reduced export competition, caused importers to buy U.S. wheat (in late 2007) at a pace
not seen since the 1970s. U.S. wheat export sales were very strong despite higher prices
and record-high ocean freight rates. Imports by high-income countries, which are not very
price sensitive, followed normal seasonal purchase patterns. However, a number of low-
and middle-income countries, generally expected to be more sensitive to price changes,
continued to purchase wheat even while prices were rising. Some importers even bought
larger amounts at record high prices, apparently out of fear that less wheat would be
available in the future, and prices would be even higher. In most years, U.S. wheat export
shipments decline seasonally during the winter, spring, and summer months. But in 2007,
shipments generally rose during this period, significantly exceeding expectations almost
every month. In August and September, U.S. wheat export volume spiked, rising from
monthly averages of less than 2.5 million metric tons to more than 4 million tons. This
occurred as wheat prices climbed to record highs. Record high outstanding export sales
(i.e., wheat that has been purchased, but not yet exported) suggest that many importers
have already purchased their future needs far in advance of normal purchasing patterns,
and that large monthly U.S. wheat shipments can be expected to continue for some
months to come, regardless of future price movements.

⁴ Most of the information for this section is from “Large U.S. Wheat Exports Despite High
Prices,” Outlook for U.S. Agricultural Trade, AES-56, ERS, USDA, pp. 13-14, November 30,

2007.

⁵ Stevenson Jacobs, “Wheat Jumps on Supply Concerns,” Washingtonpost.com, February 25,

2008.

Historically Low U.S. and Global Wheat Stocks. Global stocks are projected
to drop to a 30-year low by July 2008, following seven out of eight years in which global
consumption exceeded production (Figure 2). In the United States, the nearly three-
decades-long decline in planted area and production, coupled with the surge in export
demand, has led to projections for the lowest ending wheat stocks (237 million bushels)
since 1947.⁶
Figure 2. World Wheat Supply,Substantial Price Premium
Demand, and StocksEmerges for High-Protein Wheats.
⁷⁰⁰Because of a shortage of milling-quality
⁶⁰⁰Usewheat, prices for high-protein (13%-
15%) spring wheat (HRS) — grown
⁵⁰⁰Productionprimarily in the Northern Plains — have
⁴⁰⁰risen faster than prices for the ordinary-
³⁰⁰protein (10%-13%) wheats (HRW) ofthe Southern Plains or the low-protein
²⁰⁰wheat (SRW) grown in the Delta and
¹⁰⁰StocksCorn Belt states. In addition, in January
USDA released an estimate for last fall’s
⁰plantings of the winter wheat crop that,
¹⁹⁹⁰¹⁹⁹⁵²⁰⁰⁰²⁰⁰⁵^S^our^c^e^:^U^S^D^A^,^P^S^D^on^lⁱⁿ^e^da^t^a^ba^se^,^F^e^br^ua^r^y⁸^,^2008.
although up from last year, was
significantly below market
expectations.⁷ This increased the market concern about whether a large U.S. spring wheat
crop would be produced. As a result, cash and futures market prices for HRS wheat —
traded daily at the Minneapolis Grain Exchange (MGE) — hit almost daily record highs
through January and February. On February 25, 2008, the nearby futures contract for
HRS wheat closed at a record $24 per bushel.⁸ HRS wheat prices can be tracked in the
cash market by following daily price quotes for Dark Northern Spring (DNS) wheat out
of Minneapolis (Figure 1).
Prices for soft white wheat (grown primarily in the Pacific Northwest) have also
risen sharply in recent months. White wheat is used to produce a very popular type of
noodle eaten throughout eastern Asia. Australia is traditionally the world’s largest
supplier of white wheat, but last year’s drought-reduced harvest drastically limited its
export supplies. As a result, China and other Asian countries have been competing for
dwindling U.S. and international supplies of white wheat and this has pushed prices
sharply higher.
Pressures from Other Crops That Compete for the Same Area. U.S.
wheat planted area has been steadily declining for the past 40 years as low relative returns
have led many farmers to shift to other, more profitable activities. This phenomenon has
clearly been evident in the Northern Plains, where the development of short-season corn
and soybean varieties has steadily cut into traditional wheat areas. This process has

⁶ WASDE, USDA, World Agricultural Outlook Board, February 8, 2008.
⁷ Winter Wheat Seedings, National Agricultural Statistics Service, USDA, January 11, 2008.
⁸ Lauren Etter, “Markets on Tear: Wheat, Oil, Euro — Grain Trading Explodes in the
Minneapolis Pits; Speculators Flood In,” Wall Street Journal, February 27, 2008.

Figure 3. U.S. Farm Prices: Wheat,accelerated since late 2005 with the
Corn, & Soybeansrapid growth of corn-based ethanol
¹²²⁰⁰⁷^/⁰⁸production, which has sparked high corn
¹⁰and soybean prices (Figure 3). Wheat
prices must rise high enough to compete
⁸^S^o^yb^eaⁿ^s^USD^Afor planted acres this spring (2008) with
^P^r^o^j^ectⁱ^oⁿ^sthe other grains and oilseeds. This area
⁶competition is also contributing to the
⁴^Wh^e^a^tprice run-up at the MGE.
²Outl ook
^Co^rⁿ
⁰
¹⁹⁹⁰¹⁹⁹⁵²⁰⁰⁰²⁰⁰⁵²⁰¹⁰²⁰¹⁵^S^o^ur^c^e^:²⁰^00-²⁰⁰⁷^:^U^S^D^A^,^W^A^S^D^E^,^F^e^b^.^8,²⁰⁰⁸^;²⁰⁰⁸^,^O^C^E^O^u^t^l^o^o^kNear-Term Outlook.⁹ High
^S^p^e^e^c^h^,^F^e^b.²¹^,²⁰⁰⁸^;²^009-²⁰¹²^:^U^S^D^A^B^a^ss^e^lⁱⁿ^e^F^e^b^.²⁰⁰⁸^.commodity prices are expected to
encourage farmers to expand plantings
this spring. However, since the land base is constant, the question is which crops will get
more area and which will lose. For 2008, USDA projects that U.S. planted acreage will
expand significantly for both wheat (up 6%) and soybeans (up nearly 12%), while corn
plantings will decline slightly (by about 4%). As a result, assuming normal weather and
average yields, U.S. wheat production is expected to rise by nearly 13%. In addition,
USDA projects that global wheat plantings and output will rise substantially (although no
official estimate for 2008 global production is released until May). Larger global wheat
supplies are expected to significantly reduce international demand for U.S. wheat in the
latter half of 2008. Thus, the combination of higher production and lower exports is
expected to allow U.S. domestic wheat stocks to rebuild and wheat prices to decline from
their early 2007 peaks (while remaining high relative to past years). Markets are likely
to exhibit substantial price variability until global stock levels can be rebuilt.
Long-Term Outlook.¹⁰ As the global supply rebounds from the shortfalls of 2007,
higher projected production is expected to facilitate the rebuilding of stocks and the return
of prices to the $4 to $5 per bushel range over the next five- to ten-year period.
Food Price Effects
Domestic Food Price Inflation. The rise in agricultural prices, combined with
high oil prices, have contributed to higher food inflation in the United States and around
the world. U.S. food prices increased by 4% during 2007, the highest one-year rise since
1990. Prices for cereals and bakery products were up by 4.4%. USDA predicts that food
price inflation for 2008 will be in the range of 3% to 4%, while bakery goods are expected¹¹
to rise by 5.5% to 6.5%. Inflation concerns were further heightened when the U.S.
Bureau of Labor Statistics announced that food prices had jumped by 1.7% during the

⁹ “Grain and Oilseed Outlook for 2008,” USDA, grain and oilseed ICECs, USDA Agricultural
Outlook Forum, February 22, 2008.
¹⁰ USDA Agricultural Projections to 2017, OCE-2008-1, February 2008.
¹¹ “Food Price Outlook, 2008,” Briefing Room: Food CPI, Prices, and Expenditures, ERS, USDA,
February 25, 2008.

month of January 2008 — the biggest monthly increase in three years.¹² Despite the sharp
increases in commodity prices in 2007, most economists agree that fuel costs have played
a larger role in food price inflation than have commodity prices.¹³ In general, retail food
prices are much less volatile than farm-level prices and tend to rise by a fraction of the
change in farm prices. This is because the actual farm product represents only a small
share of the eventual retail price, whereas transportation, processing, packaging,
advertising, handling, and other costs — all vulnerable to higher fuel prices — comprise
the majority of the final sales price.
International Food Prices and Aid. Due to trade linkages, high commodity
prices ripple through international markets where impacts vary widely based on grain
import dependence and the ability to respond to higher commodity prices. Import-
dependent developing country markets are put at greater food security risk due to the
higher cost of imported commodities.
The overall impact to consumers from higher food prices depends on the proportion
of income that is spent on food. Since food costs represent a relatively small share of
consumer spending for most U.S. households (about 10%), food price increases (from
whatever source) are absorbed relatively easily in the short run. However, low-income
consumers spend a much greater proportion of their income on food than do high-income
consumers. Their larger share combined with less flexibility to adjust expenditures in
other budget areas means that any increase in food prices potentially could cause hardship.
In particular, lower-income households in many foreign markets where food imports are
an important share of national consumption and where food expenses represent a larger¹⁴
portion of the household budget may be affected by higher food prices. Humanitarian
groups have expressed concern for the potential difficulties that higher grain prices imply¹⁵
for developing countries that are net food importers.
International food aid is the United States’ major response to reducing global
hunger.¹⁶ Because most U.S. food aid activities are fixed in value by annual
appropriations, the amount of commodities that can be purchased declines with rising
food prices. In 2006, the United States provided $2.1 billion of such assistance, which
paid for the delivery and distribution of more than 3 million metric tons of U.S.
agricultural commodities. The United States provided food aid to 65 countries in 2006,
more than half of them in Sub-Saharan Africa.

¹² “Inflation at Highest Level in 26 Years,” Omaha World Herald, February 26, 2008.
¹³ For example, see John M. Urbanchuk, “The Relative Impact of Corn and Energy Prices in the
Grocery Aisle,” LECG LLC, June 14, 2007.
¹⁴ Shahla Shapouri and Stacey Rosen, “Energy Price Implications for Food Security in
Developing Countries,” Food Security Assessment, 2006, GFA-18, ERS, USDA.
¹⁵ International Monetary Fund, World Economic Outlook: Globalization and Ineqauality,
Washington, October 2007.
¹⁶ For more information see CRS Report RL33553, Agricultural Export and Food Aid Programs,
by Charles Hanrahan.