FarmPolicy

September 21, 2019

“Analysis from Washington”- By Dan Morgan- Wheat

Wheat

By Dan Morgan- Dan is a special correspondent of The Washington Post and a Transatlantic Fellow at the German Marshall Fund of the United States. “Analysis from Washington” is posted exclusively at FarmPolicy.com.

The bakers of this country are hurting, and therein lies a warning about what may lie ahead for U.S. agriculture.

About 80 of them were in Washington last week, visiting congressional offices, the White House and U.S.D.A., and issuing a 3-point plan for alleviating the “current crisis” of high wheat prices and shortages.

The American Bakers Association favors slashing acreage in the Conservation Reserve Program to free more land for wheat production; waiving the just-enacted biofuel requirements if necessary to head off severe economic harm, and “giving priority to the needs of the domestic food industry” when U.S. wheat stocks drop too low.

Such a call for government intervention in the farm economy seems strangely anachronistic in today’s booming, globalized agriculture.

We’ve seen blips before. High commodity prices invariably cause a backlash from consumers, the livestock industry, advocates for the poor and importers overseas. They demand “action” from politicians to help ease prices and curb shortages. Farmers respond by increasing their crops. Soon enough the situation corrects itself and we’re back to low prices, surpluses and farmers saying, “We told you so.”

Yet what is occurring in the markets, and in American agriculture, feels different this time around. That’s why it’s important to take the bakers seriously.

Hundreds of millions of people in Asia are flooding into urban centers where they can be fed more easily by imports than by inefficient farmers in their own countries. Incomes are rising and people have the money to buy more bread, vegetable oils and meat, best supplied by global trade.

In the United States and Europe, stepped up requirements for the use of biofuels is another new factor that is building a higher floor under prices. (There was no such ethanol mandate when Congress wrote the last farm bill in 2002.)

Meanwhile, soaring oil prices are providing incentives for gasoline makers to blend cheaper domestic ethanol, quite aside from the biofuel mandates.

The result has been record commodity prices. Global stocks of edible oils – palm, rape, soy and sunflower – are at a 30-year low. Spring wheat prices topped $20 a bushel in the Minneapolis Grain Exchange. Some bakers fear the U.S. could soon run out of rye bread. U.S. supplies reportedly are tapped out, and millers are shopping in Europe for rye.

Come April and May, durum wheat growers in Arizona and California may be able to name their own price. There will be little or none left from the 2007 North American crop from which to make pasta flour.

The usual response to high prices and shortages is more production. In the early 1970s, Agriculture Secretary Earl Butz, exhorted farmers to plant “fencerow to fencerow” after Russian grain deals and severe drought sent prices soaring.

But there are limits now to what farmers can do. Yield increases have slowed, and in the case of wheat, they have lagged. Expanding acreage isn’t the obvious option it once was. Plowing idle land, or cutting forests to make way for row crops, releases vast amounts of carbon and could affect climate. As governments move toward tighter controls on carbon emissions, farming more acres may become problematic.

That’s what has begun to create pressures for a stronger government hand in agriculture after years of laissez-faire.

The recently passed energy bill took a significant step in that direction. The legislation set aggressive requirements for gasoline manufactures to blend biofuels. But it also gave EPA, in consultation with U.S.D.A. and the Energy Department, authority to waive the requirements if they would “severely harm the economy of a state, region or the U.S.” or if domestic supplies proved inadequate.

EPA presumably can’t act yet, because it is yet to write the rules for this new law. But Congress made clear it wants the government to balance biofuels needs against other interests. “Trading independence from foreign oil for dependence on foreign sources of basic food is not in the best security interests of the country,” as the statement released last week by the American Bakers Association put it.

It is more likely that Congress will use high prices to nibble at conservation programs that have set aside vast tracts of farm country for wildlife habitat.

House Agriculture Committee Chairman Collin Peterson (D-Minn.) recently proposed an 18 percent cut in the 39.2 million acre Conservation Reserve, which pays landowners an annual rent for removing land from farming for 10 years.

The bakers support that, and they are also urging the U.S.D.A. to use its authority to waive penalties for farmers seeking an early release from their CRP contracts.

For that, the bakers have plenty of backing from agribusiness lobbies, including poultry, dairy, pork, beef, ethanol, corn sweeteners and flour, which favor increased supplies of raw materials and lower prices.

That isn’t the case with the bakers’ other proposal, which seems to imply more far-reaching supply management. It calls on USDA to “give priority to the needs of the domestic food industry” but without saying exactly how that would be done.

After Washington’s disastrous experience with export controls in the infamous 1980 embargo on grain sales to the Soviet Union, limiting sales abroad would be a desperate and unlikely move. But some kind of domestic grain reserve, perhaps modeled on the Strategic Petroleum Reserve, may not be completely implausible if inflationary pressures continue.

In most wheat growing nations and regions (except for the United States and European Union), governments view the wheat supply as too politically sensitive to leave solely to the whims of the international market. That has been evident in the current wheat shortage. Kazakhstan’s announcement last month that it was introducing export tariffs on wheat triggered a sharp jump in wheat prices worldwide, and will affect the price of bread in the United States.

Other major wheat growers, including Argentina, Russia, Ukraine and China, have taken some wheat off the world market to address supply shortfalls at home, according to a recent article in The Wall Street Journal.

“They represent a third of global wheat exports and they all restrict trade to some degree,” said Rich Feltes, senior vice president and director of commodity research at MF Global in Chicago.

That has left the United States, Canada and the EU as suppliers of last resort, and has ratcheted up prices for millers, bakers and consumers in those places.

“Our stocks here in the United States have literally been raided because of the export tariffs and controls that have been applied by government agencies in other wheat growing nations around the world,” said one wheat dealer.

Perhaps the high grain prices are just another blip, as many farmers now contend. But if they are not, the debate over managing U.S. supplies is likely to continue and intensify.

By Dan Morgan