The current episode of high wheat prices has stimulated discussion about the role of government actions to manage U.S. wheat supplies. The American Bakers Association recently suggested that Congress and USDA “carefully consider the needs of the domestic food industry first” when supplies of wheat drop to low levels. That phrase has been interpreted as suggesting an embargo of wheat exports when supplies are reduced and prices rise.

Physical supplies of wheat are tight. Randy Schnepf, Specialist in Agricultural Policy for the Congressional Research Service, in an analysis on February 29 “High Wheat Prices: What Are the Issues?” explained that the U.S. produces 9-10 percent of the world’s output, but accounts for 25 percent of exports. Poor weather conditions in 2007 resulted in smaller than expected wheat crops in Australia, Canada, Western and Eastern Europe, Ukraine, U.S. and other growing areas. Global wheat stocks in July 2008 are expected to drop to a 30 year low as world consumption has exceeded production for seven of the past eight years. On March 11 USDA projected that U.S. wheat carryover supplies at the end of the current marketing year on May 31 will be 242 million bushels, about half the level of a year ago, with a stocks to use ratio of 10 percent, the lowest since 1946/47. This year U.S. domestic food use will account for 40 percent of total domestic use and exports of U.S. wheat.

As noted in the Schnepf analysis, this market condition did not happen overnight; worldwide consumption has exceeded production in seven of the last eight years. The world market for wheat over the last four years has grown only 1.4 percent per year. U.S. wheat area harvested for grain in 2007 was 51.0 million acres, up 4.2 million acres from 2006, but down from the recent high of 62.8 million acres in 1997 and down from 80.6 million acres in 1981. Wheat farmers struggling with low profitability have sought out other crops with a higher rate of return and some wheat land entered the Conservation Reserve Program run by USDA. The low value of the U.S. dollar caused by U.S. monetary policy and short crops outside the U.S. have naturally pulled U.S. wheat supplies into the world market.

The U.S. did impose export controls on soybean shipments to Japan in 1973 during a similar time of strong international demand and rising consumer food prices caused by an inflationary monetary policy. That encouraged Japanese companies to invest in soybean production in Brazil to insure alternative supplies. The U.S. also embargoed grain to the Soviet Union in 1980 as a political response to the Soviet’s invasion of Afghanistan.

The bakers’ suggestion that Congress and USDA consider export controls has encouraged others to suggest government-controlled grain reserves. The high market prices of the early 1970s caused Congress to create in 1977 farmer-owned and government-controlled grain reserves for wheat and corn. This led to government-managed market prices as producers were allowed to enter grain in the reserve when prices were low and stocks were to be released when market prices began to increase. Stocks in the U.S. built up as other countries undercut U.S. prices on world markets; the U.S. became the supplier of last resort. This experiment in supply and price management was phased out in the late 1980s and early 1990s.

Wheat users in the U.S. have become accustomed to large stocks of wheat with market prices in a narrow band. According to Schnepf, “During the past 30 years, the all-wheat season’s average farm price has stayed within a range of $2.42 to $4.55, while averaging $3.33 per bushel.” The latest estimate by USDA shows the season’s average market price for this marketing year at $6.50-6.80 per bushel. While that is twice as high as the average for the past 30 years, it is much lower than the peak market prices of recent months.

Domestic users of wheat and flour have market opportunities to protect their businesses from price and supply risks. Futures markets are available for hard winter wheat, soft red winter wheat and hard red spring wheat. Wheat supplies can be purchased and directly stored in company facilities or can be contracted for future delivery. Users can also directly contract with growers before production to ensure that sufficient acreage is planted to a particular type of wheat. The production certainty and price stability of the last 30 years have limited interest in private efforts to ensure supply availability.

One reason wheat has lost acreage in the U.S. to corn and soybeans is that wheat yield increases over the last ten years have averaged 0.7 percent per year compared to 2.0 percent for corn and 0.9 percent for soybeans. Weed control in soybean is also more certain with Roundup Ready soybeans. The wheat industry chose to not adopt biotechnology to reduce the cost of managing weeds and increase yields. High wheat prices are causing farmers to reconsider their cropping practices. If government actions had prevented the current high wheat prices, there would be no incentive for farmers to devote more land and newer technology to wheat production.

With half of U.S. wheat production moving into export markets, U.S. policies should avoid a loss in trust of the U.S. as a reliable supplier. The 1973 and 1980 embargoes called into question the commitment of the U.S. to export markets. Interventions in the wheat market by the governments of wheat exporters like Argentina, Russia, Kazakhstan and Ukraine are not a reason for the U.S. to do the same. If the availability of international sources of wheat becomes uncertain, high-cost countries that would prefer to import wheat will be forced to produce at home rather than import from lower-cost producers. That would be a loss for consumers in those countries and a loss for producers in the lower-cost producing countries. Restricting shipments of wheat would send the wrong signal to producers and consumers.