Where did our wheat markets go?

Market analyst perspectives from a career in global wheat markets

By Mike Krueger

Russia purchased 10 million tons (about 400 million bushels) of corn and wheat from the U.S. in July 1973. The corn and wheat they bought was subsidized by the U.S. government and
was purchased on credit. Corn and wheat futures markets exploded when news of the sales became public. Prices quickly doubled, and history was made. It became known as the Great Grain Robbery.

The next five to six years in the grain industry were incredible. Every company was expanding existing export facilities and building new facilities in anticipation of a new era in world grain export markets. Farm grain prices were at all-time highs. Farmers had the green light to PRODUCE. Export margins were super healthy. Soybeans were a very minor crop in the 1970s and 80s. It was corn, wheat, barley, and oats.

It all came crashing down in January 1980. Russia invaded Afghanistan, and President Carter decided to embargo all grain sales to the Soviet Union. This decision killed the U.S. grain industry for at least 20 years. It also depressed production agriculture. Farmers could not find a price for anything in the days following the embargo announcement. U.S. grain companies had hundreds of millions of bushels of wheat and corn on the books to the Soviet Union that were now worthless.

The U.S. lost a huge and lucrative market with the stroke of a pen. Farmers suddenly couldn’t sell their production. Prices collapsed and stayed cheap for a very long time. Exporters had all these new facilities they no longer needed. Margins across all phases of American agriculture disappeared. The U.S. embargo encouraged other countries around the world to increase production to satisfy the Soviet demand.

U.S. farmers were clearly farming for the government in the early to mid-80s. Acreage set-asides were required to participate in farm programs. The U.S. Department of Agriculture (USDA) paid farmers to store their production. The 1985 Farm Bill created the Conservation Reserve Program (CRP). This program paid farmers to set aside as much as 37 million acres of cropland.

Surpluses of corn and wheat ballooned to enormous levels. The USDA became creative to encourage farmers to redeem their USDA loans and market the stored crops. The first scheme was called Payment in Kind (PIK) and started in 1983. The PIK and roll game allowed farmers to “buy back” their loaned crops for less than they owed the government and, in many cases, at below market prices. The next scheme, created in 1992, was called the Export Enhancement Program (EEP). It was a subsidy program to export U.S. wheat and corn. Finally, the “Freedom to Farm” farm bill was passed in 1996. It separated farm program payments from crop planting bases and allowed farmers to plant what the markets needed. It was called “decoupling” and has been a success.

In the meantime, the entire structure of U.S. markets changed dramatically from 1980 to the late 1990s. Grain transportation shifted from trucks and single-rail cars to shuttle trains that move 400,000 bushels in dedicated 110-car trains. These trains resulted in super efficiencies and lower freight rates from the interior to export facilities and, eventually, directly into Mexico. Shuttle trains brought tremendous consolidation to the grain industry.

Genetically modified corn and soybeans also quickly took over those markets. Round-up Ready corn and soybeans brought BIG yield gains and reduced required tillage and fertilization. These rapid advancements in seed technology, coupled with longer and wetter growing seasons across the northern Plains, pushed the Corn Belt as far west as Montana and into the southern Canadian prairies, replacing small grains (wheat, oats, barley) in producers’ rotations.

Russia went from the world’s largest importer of wheat to the world’s largest exporter following the collapse of the Soviet Union. Cheap wheat prices and cheaper freight costs switched big markets from U.S. wheat to Russia and other Eastern European countries.

World wheat production and consumption moved hand in hand to much higher levels. U.S. production and exports, however, stagnated and declined. Total world wheat exports in 1980 were just 86 million metric tons. The U.S. accounted for 43% of the world’s wheat exports that year. This marketing year total world wheat exports will be about 185 million metric tons. The U.S. will account for 13% of the total. We are living with a finite number of tillable acres in this country.

Picture of Mike Krueger

Mike Krueger

Mike Krueger is founder of The Money Farm, a grain marketing advisory service located in Fargo, N.D., now owned and run by Allison Thompson. Krueger, a former Wheat Watch columnist for 12 years, is semiretired. He still provides commodity groups with market insights and observations. He is a past director of the Minneapolis Grain Exchange and a senior analyst for World Perspectives, a Washington, D.C., agricultural consulting group.

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