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California Association of Wheat Growers (CAWG)

October 15, 2006

A BIG FALL IN AUSTRALIAN PRODUCTION SPARKS THE CBOT. (U.S. Wheat Associates) Last week, private forecasters in Australia cut the outlook for Australian production by 60 percent, sending U.S. futures markets into a frenzy. The Chicago Board of Trade (CBOT) reached the maximum 30 cent/bu increase in three sessions out of six since Wednesday, Oct. 11. Here is some perspective on the current situation:

• The CBOT has led the price rise despite lacking export interest and ample SRW supplies.
• Speculative investors, not only market fundamentals, are driving SRW prices up in relation to HRW and HRS.
• With speculators influencing prices, expect increased market volatility.
• Wheat users who need coverage of the physical commodity should see dips in the market as buying opportunities.
• Several supply and demand factors support a continued strong price environment.

U.S. SRW nearby cash prices, at $5.74/bushel on Oct. 11, were up $1.32/bu ($48/MT) in less than a month and were $1.97/bu ($72/MT) over prices paid this week last year. The gains in SRW prices have been higher than other wheat classes. The cash premium for HRW over SRW is down from $1.84/bu in late June to $0.34/bu this week. While emerging world supply and demand factors support strong prices, it is questionable if SRW fundamentals support a larger price rise than other classes.

Private forecasters in Australia predict a dramatic decline in Australian production, ranging from below 10 to 12 MMT, down from 25 MMT last year. USDA revised its estimate for Australian production down from 19.5 MMT in September to 11 MMT this week. In fact, the AWB has stopped exports from its eastern coast in order to protect domestic supplies.

Brazil, the world’s third largest wheat importer, also faces a substantial production decline this year. USDA revised its Brazilian harvest forecast down from 4.9 MMT last year to 3 MMT this year, increasing Brazil’s import needs. Yet USDA also forecasts lower than average production in Argentina, Brazil’s primary wheat supplier. Although Argentina received beneficial rains last week, USDA revised its forecast for Argentine production down to 13.25 MMT. Up from last year’s 12.5 MMT, but down from the 10-year production average of 14.8 MMT. So Brazil is likely to buy some wheat from other sources and if it does, a logical alternative is U.S. SRW because prices into the northern port of Fortaleza will be the most competitive.

In order to protect stocks for domestic supply, the Ukrainian government has imposed mandatory licensing for wheat exports through the end of the year. The disruption in exports from Ukraine increases the potential for SW and SRW exports. Earlier this year, the Argentine government suggested that they would increase export tariffs in order to maintain domestic supplies, but have yet to do so.

This year, SW and SRW have consistently been the most competitively priced wheat in the world. Without supplies available from exporters that compete in such price sensitive markets as North Africa, Egypt and the Philippines, import demand for SW and SRW will increase.

NAWG BOARD APPROVES 2007 FARM BILL PROPOSAL. The NAWG Board of Directors unanimously approved a resolution last Wednesday calling for a wheat target price of $5.29 and a direct payment of $1.19, within the structure of the 2002 Farm Bill, in new farm legislation set to be written next year. The counter cyclical and marketing loan programs have provided little if any benefit for wheat growers since 2002, in part because of recurring disasters in many wheat-growing regions and, in part, because the target price for wheat was set too low for the current market conditions.

Producing a bill that is favorable for wheat growers and correcting existing inequities between commodities were key goals for the NAWG Domestic Policy Committee and Board of Directors when examining proposals for the 2007 bill. Other considerations included the need for the 2007 bill to be as World Trade Organization compliant as is practicable.

The Committee has been examining proposals for about a year, and has included in their discussions analysis by the Food and Agricultural Policy Research Institute and Dr. James Richardson of the Agricultural and Food Policy Center at Texas A&M.

NAWG BOARD VOTES TO ADVOCATE FOR BIOMASS PRODUCERS. The NAWG Board of Directors also voted to expand the association’s advocacy function to include biomass crops. NAWG has undertaken this effort primarily because energy crop growth could provide significant economic benefits to wheat growers, improving their financial position and allowing them to provide both wheat and biomass to the market.

Opportunities presented by the production of biomass crops could let wheat growers supply feedstock for the fuel that is needed by our nation, while also providing economic benefit. Wheat straw is seen as the most favorable feedstock for cellulosic ethanol by many in this growing industry, including Iogen, a NAWG Foundation Development Committee member. Providing additional biomass through the production of dedicated energy crops could potentially lead to $40 billion in additional farm income, 600,000 new rural jobs and enhanced U.S. energy security.  

This new function will allow NAWG to represent growers as the cellulosic ethanol industry emerges, including working with Congress and the Administration on policies that favor the production of cellulosic ethanol and serving as an information conduit between biomass growers and the cellulosic ethanol industry.

In the near-term, NAWG leadership will be examining the changes that will need to be made to the association’s bylaws and how this new mandate will fit within the NAWG committee structure.

Leaders of two organizations with which NAWG has worked closely on the cellulosic ethanol issue praised the Board’s action.

OCTOBER 31^ST CLOSING DATE FOR CALIFORNIA. October 31^st is the sales closing date for a number of fall-planted crops, including wheat, in Arizona, California, Nevada and Utah. Sales closing dates vary by crop, state and county, so producers should consult a crop insurance agent to discuss their insurance options.

More information about the crop insurance process is available at:

http://www.rma.usda.gov/policies/cycle/insurance_cycle_g.html

USDA’S 2007 DCP PROGRAM ENROLLMENT OPENED OCTOBER 1^ST. The enrollment window for the 2007 Direct and Counter-cyclical Payment Program (DCP) opened October 1.  Producers can visit any USDA Service Center or their administratively assigned center to complete their 2007 DCP contract. Additionally, sign-up can be done online.

The enrollment window will close June 1, 2007, and late applications will be accepted through Sept. 30, 2007, with a $100 late fee. While DCP participants must sign DCP contracts annually, producers can choose not to participate in the program in any given year.

COMMODITY CLASSIC. In March 2007, NAWG will be joining the American Soybean Association and the National Association of Corn Growers in Florida for the annual Commodity Classic convention and trade show. Watch your mail for more information.