Author: J. Mark Welch

The Southern region of the United States is more associated with cotton production than wheat. Yet, from 2005 to 2022, a time of high grain prices associated with increased production of biofuels, wheat planted acres in the South, on average, have exceeded that of cotton (Figure 1).  Wheat acres and production in the region are dominated by Oklahoma and Texas (Figure 2); Texas also leads cotton planted acres, by far, followed by Georgia (Figure 3). In 2022, the South will account for about 20 percent of total U.S. wheat production (USDA, NASS, Crop Production, August 2022). 

The year with the most wheat acres in the South in this ‘biofuel era’ is 2013 at 17.3 million. That year saw the highest plantings in seven of the fourteen states in the region for this period of time: Alabama, Kentucky, Mississippi, North Carolina, South Carolina, Tennessee, and Virginia. Oklahoma and Texas are not on this list. Acreage increases across multiple states can add up to make a significant difference in total wheat area in the region.  

Wheat is a crop with relatively high yield potential across the South. This becomes especially important when drought impacts major producing states.  With drought lowering harvested acres and yields, Oklahoma and Texas are projected to produce about 109 million bushels of wheat in 2022 from 4 million harvested acres and 9.8 million acres planted (Figure 4).  The states of Kentucky, Tennessee, North Carolina, Maryland, and Virginia combined to plant about 2 million acres of wheat for 2022 and will match the production total in Oklahoma and Texas. Kentucky’s production alone is 90 percent of that of Texas.  

Years with high wheat acres in the South tend to be associated with years of relatively low cotton acres (Figure 5).  Crop acres are positively correlated with the price received in the previous season (Figures 6 and 7). Wheat acres are negatively correlated to higher cotton prices (Figure 8).  Additionally, wheat acres tend to go up following years of high abandonment of cotton in Texas and Oklahoma (abandonment rates in other Southeastern states are minimal) (Figure 9).  In 2022, Texas and Oklahoma farmers planted 8.6 million acres of cotton, only to harvest 2.8 million (a harvested-to-planted percentage of 33 percent). 

Looking ahead to 2023, what are wheat acreage prospects in the South given:

• record high wheat prices^[*]
• record high cotton prices^*, and
• high cotton abandonment in Texas and Oklahoma? 

A regression model composed of these independent variables and recent trends in wheat planted acres shows that wheat planted area:

• is trending lower,
• goes up when the price of wheat the previous year goes up,
• goes down when the price of cotton the previous year goes up,
• goes up when percent of cotton harvested in Texas and Oklahoma the previous year goes down.   

Based on these variables, the model estimate of wheat acres in the South for 2023 is 14.4 million, up from 12.7 million acres planted in 2022 (Figure 10). Many factors will shape farmers’ planting decisions in 2023, among them persistently high input costs, lingering drought, returns from other crops such as corn and soybeans, and price prospects given global economic and geopolitical turmoil and uncertainty. This model suggests that significant factors are in place for an increase in wheat acres in 2023, maintaining wheat as an important crop enterprise in the South. 

Figure 1. Southern region planted wheat and cotton acres, 2005-2022

Figure 2. High, low, and average winter wheat acres in the South, 2005-2022

Figure 3. High low, and average cotton acres in the South, 2005-2022

Figure 4. Southern region wheat production 2022, million bushels

Figure 5. Wheat acres and cotton acres in the South, 2005-2022

Figure 6. Wheat acres in the South and the previous year’s wheat price, 2006-2022

Figure 7. Cotton acres in the South and the previous year’s cotton price, 2006-2022

Figure 8. Wheat acres in the South and the previous year’s cotton price, 2006-2022

Figure 9. Wheat acres in the South and percent cotton acres harvested the previous year in Texas and Oklahoma, 2006-2022

Figure 10. Southern region wheat acreage model

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^[*] U.S. Season Average Farm Price, World Agricultural Supply and Demand Estimates, September 2022

Welch, J. Mark. “Wheat Acres in the South“. Southern Ag Today 2(43.1). October 17, 2022. Permalink

Feed and residual use has long been the largest consumption category in the USDA supply and demand tables for U.S. corn (Figure 1)^[1]. That began to change with the passage of the Renewable Fuel Standard Program in 2005^[2]. Corn for fuel increased over the next several years, from under two billion bushels in the 2005/2006 marketing year to over five billion bushels in 2011/2012 when it overtook corn for feed as the number one use category.  Since then, fuel and feed have competed for the top spot for corn consumption.   

Additionally, the price of corn has been increasing in the biofuel era. From the increased planting flexibility in the Freedom to Farm Act in 1996 to the passage of the Renewable Fuel Standard in 2005, prices averaged $2.15 per bushel with a low of $1.82 in 1999 and a high of $2.71 in 1996. From 2006 to 2021, the average price more than doubled to $4.33 per bushel with a low of $3.04 in 2006 and high of $6.89 in 2012. Currently, the price estimate for the 2022 corn crop is $6.65, reflective of a 54% increase in one year alone.

The peak in corn for feed consumption came in the 2004/2005 marketing year at just over six billion bushels. After the passage of the Renewable Fuel Standard in 2005, feed use began to fall, and the price of corn began to increase (Figure 2). From 2013 to 2019, the price of corn appears to be associated with an increase in feed use. Since 2020, feed use has fallen with increases in corn price.

There is more to the corn story than the inverse relationship between feed input demand and prices, and the implications of relatively higher corn prices are always looming. In spite of the fall in corn for feed use in 2006 associated with the RFS, an ethanol fuel co-product became available known as distiller’s dried grains with solubles (DDGS).  Each bushel of corn (56 pounds) used for fuel produces about 16 pounds of DDGS which adds to feed grain production, providing some price relief to cattle, pork, and poultry producers.  In addition, the size of the livestock and poultry industries, measured by grain consuming animal units (GCAUs), has grown from about 75 million in the 1980s to 101.7 million GCAUs in 2019 (Figure 3). Another trend in the feed use category we can draw from GCAUs is the inverse relationship between corn prices and feed use. There was a rebound in use as prices fell from their record highs in 2012 with a peak in 2014. Even with relatively low and stable prices, energy feed plus DDGS per GCAU has been on a downward trend. That points to an increasingly efficient meat sector producing more pounds of protein on fewer pounds of feed.  

What does this mean for corn prices moving forward? From the demand side of the balance sheet, the feed use category near term looks to be limited by lower overall GCAUs and declining feed use per GCAU. As livestock and poultry numbers increase and as grain prices go down, we may not return to previous levels of use. Improved feeding efficiencies may dampen the feed use response in future supply and demand balance sheets.   

Figure 1. U.S. Corn Use

Figure 2. U.S. Corn Feed and Residual Use and Season Average Farm Price

Figure 3. Grain Consuming Animal Units (GCAU) and Energy Feed per GCAU

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^[1] For an explanation of the feed and residual use category used by USDA in their supply and demand tables, see “Implications of an Early Corn Crop Harvest for Feed and Residual Use Estimates”, FDS-12f-01, Economic Research Service/USDA July 2012.

^[2] Details of the Renewable Fuel Standard Program authorized under the Energy Policy Act of 2005 and expanded under the Energy Independence and Security Act of 2007 can be found at https://www.epa.gov/renewable-fuel-standard-program.

The 2023 winter wheat crop will soon be going in the ground.  As planning and preparations are under way, producers continue to struggle with the challenges of high input costs, volatile commodity markets, weather extremes (drought in the west, flooding in the east), and global geopolitical instability. 

As many input costs are being locked in, an important question is where do output prices go from here? A key tenet of economic theory provides insight into that question. In 1890, Lord Alfred Marshall told us where prices are going in the long run: prices will go to the cost of production (Marshall, 1890).  In a free market economy, a price above the cost of production will provide incentives for an increase in supply or entice other entrants into the market. Prices below the cost of production will cause supply to decrease or participants to exit the marketplace.  

Successful and sustainable financial performance in an economy where prices move to the cost of production implies two key components of management strategy that revolve around production and price:

1. Be the low cost/high quality producer. Input use efficiency is critical to achieve the lowest possible breakeven cost. Tools to achieve this goal include the use of crop rotations, hybrid and variety selection, conservation tillage, soil, and plant testing, and precision application of inputs.
2. Lock in profitable prices.  Tools of financial management include budgets and breakeven analyses, cash flow projections, crop insurance, marketing plans, and price safety net provisions. 

Does this management approach work?  Evidence of the impact of these management strategies can be found by looking at the financial performance of the top 20 percent of corn producers over the last several years.  This information can be found in the FINBIN database (FINBIN, 2022). This database summarizes actual farm data from thousands of agricultural producers.  

Sorting key production and price characteristics by financial performance shows that, compared to the overall average, the top 20 percent of corn growers in 2021 had higher yields, received higher prices, and had lower costs (Figure 1).  Looking back over the last several years, this group, the top 20 percent, outperformed the average every year in every category with one lone exception. In 2018, the average of all corn producers received a one percent higher price (Figure 2).  

As a farm management philosophy, consider the adoption of what Danny Klinefelter, retired professor in the Department of Agricultural Economics at Texas A&M University and founder of The Executive Program for Agricultural Producers (TEPAP), calls the ‘5% rule’ (Janzen, 2018).  In the upcoming crop year, where can I lower my costs by five percent? How can I increase my yields by five percent? How can I increase my average price received by five percent? Making relatively small changes in critically important areas over time can have a dramatic impact on financial performance.    

Figure 1. 2021 Corn on Cash Rent Summary Report

Figure 2. Corn on Cash Rent Summary Report Comparisons, High 20% to Overall Average, 2018-202

References

FINBIN. Center for Farm Financial Management, University of Minnesota. Accessed August 1, 2022 and available at https://finbin.umn.edu/. 

Janzen, Joseph. “The “5% rule of farm management shows how all the pieces matter”, Department of Agricultural Economics and Economics, Montana State University, Business and Finance posts, January 16, 2018.  Accessed August 2, 2022 and available at https://ageconmt.com/. 

Marshall, Alfred. Principles of Economics, London: Macmillan, 1890.  

Welch, J. Mark. “Key Farm Management Considerations in Turbulent Times: The 5% Rule“. Southern Ag Today 2(34.1). August 15, 2022. Permalink

Since the early 2000’s, global economic growth has been driven by emerging market and developing economies (Figure 1). Since 2000, the average annual increase in Gross Domestic Product (GDP) from this group of nations has been five percent, compared to just under two percent for advanced economies.  The “altered economic landscape” of the 21^st century that drove this growth includes technical change (the internet, and access to it), lower transportation and communication costs, reductions in tariff rates and other barriers to trade, in general, lower costs of international trade.  This transformation reduced poverty and improved living standards across much of the globe (Krueger, 2006).  

Figure 1. Global Economic Growth, Annual Percentage Change, GDP, 1980-2022, 2023-2027 projected

Average incomes in the largest economies within the category of ‘Emerging market and developing economies’—Brazil, Russia, India, China, Mexico, Indonesia, Vietnam, Philippines, Thailand, Malaysia, a group that accounts for half of the world’s population—started to rise rapidly in 2003 (Figure 2) (IMF, 2022).  Measured in current $US, the average income in these ten countries (weighted by population) from 1980 to 2002 increased from $433 to $1,232, about $35 per year.  Incomes grew from $1,356 in 2003 to $6,319 in 2020, about $275 per year.  

Figure 2. Emerging Economies Gross National Income Per Capita and World Per Capita Grain Use

This economic activity has had a direct impact on grain markets. While world grain consumption (barley, corn, millet, mixed grains, oats, rice, rye, sorghum, and wheat) increased steadily from 1980 to 2002, per capita grain consumption was flat to trending lower from 1980 to 2002.  Beginning in the 2003/2004 marketing year, per capita consumption began to increase along with incomes in emerging economies, from 312 kg per person to 364 kg per person in 2021/22, an increase of 17 percent. As incomes grew in emerging economies, so did the demand for grain—for food, feed, and fuel—in the subsequent marketing years. For comparison, per capita grain use in the rest of the world (all countries other than emerging economies) increased seven percent from 2003/04 to 2021/22. Measuring consumption on a per capita basis accounts for overall population growth experienced in these emerging economies over this time span. 

Since 2003, there have been five marketing years in which a decline in production has been associated with a drop in per capita use: 2006/2007, 2012/2013, 2015/2016, 2017/2018, and projections for the new marketing year, 2022/2023 (Table 1).  In 2012/13 and 2015/16, the setback in grain use was short lived, in that after a one-year decrease, consumption increased to a new, higher level in the year following.  That increase in use coincided with increased production and a continued rise in average incomes.   

Table 1. World Grain Production* and Per Capita Grain Use

Marketing Year	World Grain Productionmmt	Production Change mmt	Per Capita Grain UseKg/person	Use Change
2003/2004	1,866	43	312	1.97
2004/2005	2,044	178	315	3.43
2005/2006	2,017	(27)	317	2.02
2006/2007	2,005	(12)	316	(0.71)
2007/2008	2,132	127	322	5.46
2008/2009	2,252	120	327	5.48
2009/2010	2,253	1	330	2.78
2010/2011	2,213	(40)	330	0.15
2011/2012	2,344	130	339	9.02
2012/2013	2,296	(48)	329	(10.71)
2013/2014	2,512	217	343	14.41
2014/2015	2,560	48	346	3.25
2015/2016	2,518	(42)	341	(4.80)
2016/2017	2,668	150	358	16.39
2017/2018	2,619	(49)	354	(4.25)
2018/2019	2,632	13	355	1.98
2019/2020	2,680	48	356	0.44
2020/2021	2,724	44	361	5.03
2021/2022	2,794	69	364	3.06
2022/2023p	2,765	(28)	360	(4.32)

Due to mostly geopolitical events, the 2022/2023 marketing year for grains is shaping up as a short crop year.  Inflation, rising interest rates, and lingering pandemic impacts are among the factors limiting economic growth prospects in the near term. Among the factors that will determine whether we extend the recent trend in world per capita grain use are future crop production levels and global economic conditions.  The combination of a short-crop and a slowdown in income growth can impact per capita grain use beyond the current marketing year.  

References:

Krueger, Anne O. “The World Economy at the Start of the 21^st Century”, International Monetary Fund, Annual Gilbert Lecture, Rochester University, New York, April 6, 2006. Accessed May 31, 2022 and available online at https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp040606.

International Monetary Fund (IMF). IMF Datamapper. Accessed May 31, 2022 and available online at https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD.

USDA, Foreign Agricultural Service. Production, Supply and Distribution (PSD). Accessed June 8, 2022 and available online at https://apps.fas.usda.gov/psdonline/app/index.html#/app/home.

World Bank. DataBank. Accessed June 8, 2022 and available online at https://databank.worldbank.org/home.aspx.

Welch, J. Mark. “World Per Capita Grain Consumption and Global Economic Growth“. Southern Ag Today 2(25.1). June 13, 2022. Permalink

The war between Russia and Ukraine has upended grain flows from the Black Sea region for months. Since the first days of fighting in late February, Ukraine’s export terminals in the southern part of the country have been closed. This from a nation that provides 10 percent of the world’s wheat exports and 12 percent of global corn exports.  

As fighting continues, the threat to grain supplies extends beyond the export of old crop grain (2021/2022 marketing year) to the production of the 2022 crop.  Russia, with its military control of the region, may still be able to provide wheat to its trading partners. The world wheat trade has other participants that may be able to increase their sales.  

The impact of the conflict on the feed grain market may be harder to compensate for. Ukraine is the fourth largest corn exporter, 23 mmt in 2021/2022, 12 percent of the world total, and there are not many other major export providers of feed grain. After Ukraine, the next largest corn exporter is the EU at 4.9 mmt or 2.5 percent of total exports.  Much uncertainty surrounds Ukrainian agriculture and market participation in the upcoming crop year in terms of productive capacity, foreign market access, and export controls due to domestic food security concerns. What will the implications be for 2022 world feed grain fundamentals—supply and demand—without the contribution of Ukrainian agriculture? 

In this article, feed grain statistics are those reported for world coarse grains by USDA (corn, sorghum, barley, oats, rye, millet, and mixed grains) as well as wheat for feed.  Since 1980, wheat for feed has constituted about 20 percent of total world domestic wheat use (Figure 1).  The contribution of wheat as a feed grain for this analysis will be 20 percent of total wheat production, use, and stocks.

Without Ukraine, feed grain supplies in the 2022/2023 marketing year would decrease by about 60 mmt: 53 mmt for coarse grains and 7 mmt of wheat (USDA, WASDE, 2022). A simple linear regression model of the response in consumption to a supply change in feed grains yields a regression coefficient of +0.34, in that a 60 mmt decrease in supply would have an estimated 20 mmt decrease in use (Figure 2). 

Using those estimates, without Ukraine, the feed grain days of use on hand at the end of the marketing year would fall to a 78-day supply in the 2022/2023 marketing year, down from an 85-day supply for 2021/2022.  This extends the downward trend of the last six years, a time frame in which the marketing year average price of corn, which accounts for over 70 percent of all feed grains, has increased from $3.36 per bushel to a current estimate of $5.80 per bushel. This would be the lowest days of use on hand number since 2013/2014 (Table 1 and Figure 3). The years of tightest stocks to use in feed grains (lowest days on hand) since 1980 was from 2003/2004 to 2012/2013.  

If, instead of a complete loss, the supply of feed grain in the upcoming marketing year from Ukraine were to decline by half, that would reduce world feed grain supplies by 30 mmt and use by about 10 mmt. The resulting days of use on hand at the end of the marketing year would be an 81.6-day supply.  The impact of the Russia/Ukraine conflict is having severe and significant impacts on the world grain trade. In the short term, this impact is creating the tightest supply situation for feed grains that we have seen in the last ten years.  The World Food Program’s emergency coordinator in Ukraine expects 20 percent of planted acres will not be harvested this July and that spring planted area will be down by about one third (Reuters, 4/21/2022).  Even if this conflict were to be resolved relatively soon, damaged infrastructure will limit commodity shipments for an extended period of time.  The longer drawn out the conflict, the greater the magnitude of fundamental adjustments that will be required 

Figure 1. World wheat feed use as a percentage of total domestic use, 1980/1981-2021/2022

Figure 2. Response in feed grain use to a change in feed grain production

Table 1. World feed grain production, use, stocks, days on hand, and the corn marketing average farm price

	Beginning stocks, mmt	Production, mmt	Use, mmt	Ending Stocks, mmt	Days on Hand	U.S. Corn MYA $/bu
2016/2017	399	1,566	1,526	438	105	3.36
2017/2018	438	1,514	1,524	428	103	3.36
2018/2019	428	1,545	1,561	406	95	3.61
2019/2020	406	1,570	1,572	396	92	3.56
2020/2021	396	1,592	1,610	379	86	4.53
2021/2022	379	1,657	1,655	386	85	5.80
2022/2023 est	386	1,597	1,634	349	78

Figure 3. World feed grain production, use, and days of use on hand at the end of the marketing year, 1980-2021, and 2022 estimate

Welch, J. Mark. “Outlook for Feed Grain Fundamentals in the 2022/2023 Marketing Year“. Southern Ag Today 2(21.1). May 16, 2022. Permalink