Agriculture

2010 global wheat glut drives local farmers to other crops

This year might not be a good one for local farm incomes. A global glut in wheat has driven down prices significantly from their heyday in 2008.

Australia and Russia have seen their harvests rise by a third in the past two years, creating the biggest worldwide glut of wheat since 2002. The wheat supply is at a 22-year high in the U.S.

Analysts recently surveyed by Bloomberg expect an 8.6 percent price drop by July. That is echoed by local market advisers.

At the same time, farmers in the central U.S. have cut their acreage of winter wheat to the lowest level in nearly 100 years, one analyst said, switching to other crops with better prices or just not planting because of bad weather.

In some instances, heavy rains in the fall kept local farmers from getting into the fields to harvest summer crops such as corn and soybeans until too late to plant the wheat. Winter wheat acreage in Kansas in 2010 is down 7.5 percent from the year before.

Wheat really is the best crop for central Kansas, said Scott Van Allen, a farmer in northern Sumner County.

That leaves many farmers with fewer choices when prices drop.

"You plant wheat and hope for the best," said Van Allen, who has planted 2,500 acres of his 2,800 acres in northern Sumner County in wheat.

A year of surpluses

It takes about a year for the market to work through a surplus, said Chad Hart, an agricultural economist at Iowa State University.

Lower prices, greater supply from foreign competitors and lower acreage at home likely will mean lower incomes.

But — and there's always a but in agriculture — local farmers have a range of options to reduce the impact of the price fluctuations.

They might sell all or part of the crop in advance. But since the price of wheat isn't above the level of government price supports, there's little incentive at the moment.

Or they can hedge it with futures or options. Or sell some or all of it at harvest. Or they can store some or all of it and wait for higher prices.

While they are waiting for their wheat prices to rise, farmers must decide whether to plant wheat again or switch to other crops, if they have the moisture to support different crops. Farms west of Wichita tend to be limited to wheat, unless irrigated, while those to the east have more options.

Kent Ott, who farms in the Mulvane area, said he typically devotes about a third of his acres of wheat.

This year, the low wheat prices are causing him to consider switching more of that to milo and soybeans.

But weather, as always, plays a decisive factor. Milo and soybeans typically need a little rain during the hot summer months.

"We will have less incentive to plant wheat this fall," he said. "But it's really about the weather. If the summer crops fail, there will be more wheat acres."

A complicated market

Prices have actually started to rise since April 1 as investors have begun to cover their short positions — bets on the future markets that prices would continue falling.

Longer term, said Arlan Suderman, a Wichita-based grain marketer, prices have become somewhat divorced from supply and demand.

Although he sees the surplus holding down prices for the rest of the year, he sees prices rising in the longer term.

The global surplus is the result of particularly favorable weather, Suderman said.

Many of the major wheat producing countries will see smaller harvests or reduced wheat acreage in the coming year. And speculators are starting to buy the cheap grain in anticipation of future short-falls.

"They see it as a long-term investment," he said. "They are betting we'll see another spike."

Farmers have become much more sophisticated about understanding the market, but the market has also become much more complicated, said Tom Leffler, a commodity broker/market adviser in Augusta.

It's no longer just weather, government regulations and the regular cycle of price ups and downs, he said.

Now, it's part of international financial markets as well, including the mood of investors, currency fluctuations, and the performance of the stock and commodity markets.

Farmers have to get out of the deeply ingrained habit — familiar to many amateur players in the stock market — of waiting for the highest possible price to sell.

Leffler and Suderman say the markets have gotten too complicated to outguess.

They say farmers should approach farming instead as a business, selling when the prices exceed costs to lock in profits.

"They have to focus on the profit margin and grow their equity in the farm," Suderman said.

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