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Wheat Prices Rise, but
Analysts Point to Complicating Factors

by Jim Gransbery
The Billings Gazette, September 13, 2007

Wheat futures in Chicago nudged over the $9-a-bushel mark in early trading Wednesday before falling back as all commodity markets continued their volatility of recent weeks.

Crude oil hit a record $80.18 a barrel before closing at $79.91.

"You ain't seen nothing yet," Mike Billings, a commodity broker in Billings, said Wednesday as he noted the value of the dollar dropped to a 20-year low on Wednesday. The "fire sale" on wheat will continue until the market does its job to reallocate resources, he said.

For some Montana farmers who have experienced the lows over the past 30 years, the run-up has been a surprise. But the price should be even higher, some say, to offset production costs that have soared the past two years.

"It surprises me that countries are buying at these prices," said farmer Bud Leuthold of Billings. "You can raise wheat in a lot of places."

Because the crops in a lot of places are poor this year, U.S. wheat markets have been ramping up at a record pace for the past three weeks.

Two weeks ago, India bought 795,000 metric tons in one purchase, setting off a scramble for supplies. In its monthly report Wednesday, the U.S. Department of Agriculture forecast that world wheat supplies will be at a 33-year low at the end of May 2008. Poor wheat production in the Northern Hemisphere, and drought-stunted crops in the southern half of the globe, has forced countries dependent on imports to buy and store stocks.

Leuthold acknowledged that hungry people tend to blame and sometimes overthrow governments.

"Congress has always supported farmers," he said.

In the early 1980s, Leuthold and members of the Montana Grain Growers Association persuaded Congress to lower the loan price on wheat that had created a huge surplus in storage and depressed the market price.

"The law of supply and demand is working," he said of the current situation. The high prices could cure the supply-and-demand pressure by encouraging the planting of more wheat. "Wheat is now of more value than corn and soybeans."

Leuthold, 71, was president of the National Association of Wheat Growers in the mid-1980s, raising wheat on the family farm near Molt. Tired of fighting the drought and the high cost of machinery, the land was planted to hay and grass a few years ago.

"I rolled up 3,000 bales this year," he said. "I could have sold two or three times as much."

Recalling the winter meeting in 1982 when Montana Grain Growers Association members gathered at Big Sky to formulate the plan that eventually became part of the 1985 Farm Bill, Leuthold said the high loan rate at the time set the floor price for the world and there was no market except growing for the government. When the market price was below the loan, farmers forfeited their wheat to the government, which spent millions in storage costs.

"We took a few shots on that recommendation, but it eventually allowed market forces to work," he said.

Grain production expenses nowadays are a troubling factor to deal with, he said.

"There is not a lot of room for mistakes," Leuthold said. "You need good crops to break even."

"Prices sound very, very high," said Knud Grosen, a compatriot of Leuthold's in the 1982 loan price re-evaluation. "But the $5.55 a bushel I received in 1975 had a lot more value than $9."

Grosen, 77, is retired from active farming but still keeps pace with the industry. His land at Big Sandy is leased out.

He said the cutback on the loan in the '80s "was the right thing to do. We took a fair amount of criticism, but it removed the floor price for our competitors."

Grosen said $9 a bushel is a fair price, but "it won't stay there. It is inviting more acreage." He said the cost of production had increased at least four times since the 1970s.

Montana winter wheat farmers will be planting their 2008 crop in the next two to three weeks, depending on when there is enough moisture in the ground to get it going.

Hard red winter wheat Wednesday got as high as $8.80 a bushel for December delivery before dropping back to $8.32 as traders took some profits on the increase of recent days.

While those prices are historic highs, Ernie Downs, who has land under wheat cultivation at Molt, said "50 years ago a bushel of wheat was equal to a barrel of oil."

So wheat is not high enough?

Dan Downs, his son, said for wheat prices to be on an equal level, it should be multiplied by a factor six comparing the cost of a tractor in 1975 to one now.

"The price of wheat should be $30 to match that," he said.

While it is unlikely to reach that level, Mike Billings said the wheat market "stop point" is yet to come.

The first function of price in the market is to allocate resources to their highest valued use, he said. That signals farmers what to produce and how much. It encourages them to shift to the planting of wheat from other crops. Price determines the liquidation of inventories, he said. When the price gets high enough, substitution will take effect.

Billings said he thinks the stage is being set for an inflation cycle, and the Federal Reserve Board may be forced to raise interest rates rather than lower them, as Wall Street and Congress are clamoring for to help to relieve the credit crisis brought on by the subprime lending mess in the housing market.

Jim Gransbery
Wheat Prices Rise, but Analysts Point to Complicating Factors
The Billings Gazette, September 13, 2007

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