SIC 0111
WHEAT



This industry consists of establishments primarily engaged in the production of wheat or whose sales of wheat account for more than 50 percent of total value of sales for their agricultural production.

NAICS Code(s)

111140 (Wheat Farming)

Industry Snapshot

Wheat farms in the United States produced an estimated 2.9 billion bushels of grain in the 2001-02 season, harvesting approximately 53 million acres with an average yield of 42 bushels per acre. Wheat is the third largest crop in the United States in terms of acres harvested, with Kansas, North Dakota, Montana, Washington, and Oklahoma harvesting the most. Season average farm prices (SAFP) for American wheat were projected to be between $2.75 to $2.85 per bushel and depended on an enormous range of environmental, political, economic, and technological factors. Although some wheat is used as livestock feed, it is largely used to make flour. The United States is the world's top exporter of wheat. In the early 2000s roughly 50 percent of total harvested crops were accounted for in exports.

Due to the importance of U.S. wheat in international trade and the integral role the U.S. Department of Agriculture (USDA) played in every sector of the agricultural economy, wheat farmers were in many ways more affected by shifts in the political climate than by actual weather conditions.

The U.S. wheat industry was also a world leader in research and development, a point underscored by the unparalleled variety of wheat grown by American farmers. While the Hard Red Winter (HRW) Wheat crop is much larger than other wheat crops (accounting for about 40 percent of the total wheat supply), there were five other commercial classes of U.S. wheat: Hard Red Spring (HRS), Soft Red Winter (SRW), White, Durum, and Red Durum.

Distribution, Production Conditions, and Use. Although wheat is grown in virtually every state, the focal point of the industry is in the central and southern Great Plains Region where Hard Red Winter Wheat is produced. There, in states like Kansas, Oklahoma, Nebraska, Texas, and Colorado, the winters are cold and dry, while the summers are hot. Precipitation, which varies over the region (between 13 and 30 inches annually), can fluctuate drastically, and droughts periodically afflict wide areas for a succession of years. Farms are generally large and employ extensive, as opposed to intensive, methods of crop production. Wheat farmers employ various systems of crop rotation depending on field soil moisture. Most often, farmers alternate a year of wheat with a year of fallow to conserve soil moisture, and HRW wheat is sown in late autumn and harvested in the spring. Wheat production is highly mechanized in the region. A farm worker can typically sow 100 acres or combine-harvest 50 acres in a workday. When milled, HRW wheat produces strong baking and high-quality bread-making flours.

The main region for Hard Red Spring wheat is the northern Great Plains region, where winters are too harsh for HRW wheat production. The soils are deep, rich, black or brown grassland soils. HRS wheat is usually sown in late April and harvested in August. On average, 80 percent of the annual 15 to 25 inches of rainfall comes during this short growing season. A great variety of crops are used in rotation with wheat, and summer fallowing is becoming rare except in the driest areas. The climatic and soil conditions give HRS wheat a high protein content, strong gluten, and high baking strength. Its flour is excellent for breadmaking and can support weaker flours when combined with them in breads.

The Pacific Northwest is the third significant American wheat-producing region. There, on the Columbia Plateau in the valley of the Columbia River, large areas of rolling farmland are protected by mountains, and the climate is moderated by the Japanese Current. Most of the wheat grown in this region is white-grained, or "White wheat." It is produced in semi-arid zones (10-20 inches of rainfall/year), sown in autumn, and harvested in the spring. Because of the varying altitudes, however, almost all other kinds of wheat (including various wheats falling under the "White" designation) are also cultivated. The region's wheat production, crop rotation, and mechanization methods are similar to those used by farmers in the Great Plains. Because of the different topography of the Columbia Plateau, however, combines are often specially designed with self-leveling mechanisms to operate on hillsides. Most White wheat flour is suited only for pastry and crackers.

The Eastern part of the country produces wheat on a much smaller scale than the rest of the country and also generally produces inferior wheats of a softer texture and lower protein content. The majority of the wheat in this region, including Soft Red Winter in the central and southeastern states and White in New York and Michigan, is grown as part of a complex crop rotation system on farms that specialize in other agricultural products. However, the farming methods used on these smaller farms have often resulted in higher wheat yields than those recorded in the major wheat regions.

Organization and Structure

Wheat farmers are part of a large and increasingly complex agribusiness commodity system. The multileveled structure of the wheat industry as a whole includes farm suppliers, storage operators, processors, wholesalers, and retailers, as well as government institutions, futures markets, and trade associations. Despite the continuing movement toward expansion and consolidation, however, the wheat farmer is still, by and large, an independent operator. Farmers generally till and harvest their own land and sell goods to the highest bidder at the next level of the wheat system, usually a grain elevator operator or a miller-agent.

Certain support and control structures are necessary to ensure an adequate wheat supply for the consumer market while controlling production levels to secure price levels. With one harvest a year for each class of wheat, combined with year-round consumption, imbalances between supply and demand are sometimes immense. Moreover, forecasting supplies can be difficult, since such forecasts must rely on weather conditions, which affect both the quality and quantity of wheat from year to year. In addition, technological advances have resulted in higher yields, which makes projections even more indeterminate. Consequently, without price supports, wheat farmers can fall prey to severe price, and thus, income, swings. The economic, social, and political repercussions of such fluctuations demand that the government assume some control of the wheat-growing industry.

Government Programs. The USDA submits a new wheat program every year as an amendment to a larger legislative act (like the Food, Agriculture, Conservation, and Trade Act), under which all agricultural activity is regulated. In these programs, the USDA makes adjustments to various price and income support strategies. First, the wheat program (like any other commodity program) bases support payments on a certain fixed "eligible production," which is defined as a farm's wheat acreage multiplied by its yield (both averaged over five years). Exceeding the set acreage makes a farmer ineligible for payments, while exceeding the yield means that only the excess production is excluded from program benefits. To give wheat farmers some flexibility in planting decisions, there are "flex acreage" provisions that allow farmers to set aside some program acreage to lie fallow or to plant with other crops. Other provisions affecting a farmer's acreage are called Acreage Reduction Programs (ARPs), which are designed to control production, raise market prices, and lower government outlays. The USDA usually requires program participants to idle some percentage of their base acreage, a number that is set annually by the Secretary of Agriculture.

Perhaps the most important annual figures released in wheat programs are the target prices for each class of wheat. For each bushel of eligible production, the wheat farmer is assured of receiving the target price, and he also receives deficiency payments equal to the difference between the target price and either the current market price or the loan rate, whichever is highest. If the target price is $4 per bushel and farmers can only get $3.50 for a bushel (either as a loan or as an actual price), then they receive a deficiency payment of $.50 per bushel. Additionally, loan rates are set by the government and also act as price supports, because they are nonrecourse loans in which the government's right to recovery is limited to the crop used as collateral. If the market price is close to, or below, the loan rate, then the wheat farmer simply defaults on it and transfers title of his crop to the government. Excess units of production, while not eligible for deficiency payments, are included in the loan program; consequently, loan rates are important to consider when making planting decisions.

Although these price and income support provisions directly influence wheat farmers, there are many other programs under existing agricultural legislation that also profoundly affect a farmer's business. Other types of government assistance include wheat stock control mechanisms, credit programs, and crop insurance and disaster payment provisions.

In order to give the farmer some control over the point at which his wheat enters the market, the government established the Farmer-Owned Reserve (FOR). Under the direction of the Secretary of Agriculture, the FOR makes multiyear loans to wheat producers to maintain reserve stocks. Whenever less than 300 million bushels of wheat are maintained in the FOR and the market price is less than 140 percent of the nonrecourse loan rate, participation in the FOR is encouraged through incentives like raising storage payments. By the same token, if participation exceeds 30 percent of the estimated use of wheat, the Secretary of Agriculture closes the reserve. Once the market price exceeds the target price or 140 percent of the loan rate for the year in which the crop is harvested, a farmer enrolled in the FOR no longer receives storage payments and can market his wheat.

The other stock control mechanism is the Commodity Credit Corporation (CCC), which acquires surplus wheat through loan forfeitures and direct purchases; it then releases its stocks only under certain domestic and foreign programs. In early 1999, the USDA's CCC purchased more than 1 million metric tons of HRW wheat. Valued at approximately $133.5 million at the time, it was the largest purchase of wheat on a single day by the CCC.

Programs that provide either direct credit or credit guarantees are essential to wheat producers. The Farmer Credit System (FCS), not formally a government agency even though it is sponsored by the USDA, provides credit and related services to wheat farmers. However, since 1987, the FCS has operated in conjunction with a new entity, the Federal Agricultural Mortgage Corporation ("Farmer Mac"), which establishes underwriting standards for agricultural mortgages, and, to a degree, covers defaults. Finally, the Farmer's Home Administration (FmHA) is a guarantor of loans made by agricultural lenders and also acts as a lender of last resort for family farmers who are unable to obtain credit under reasonable terms.

A variety of crop insurances are available to farmers to insure some portion of their established yields, with premiums subsidized by the government. Historically, farmers have not purchased insurance, which cannot cover all of their losses. Disaster payment legislation has, thus, regularly been passed to cover major droughts or flooding.

The last two major areas of government intervention in the wheat-growing industry—trade and environmental conservation—serve to illustrate the larger context in which the industry operates. Primarily as a way of protecting American farmland from erosion (but also to control soil salinity and off-farm environmental threats), the USDA solicits bids from year to year for enrollment in its Conservation Reserve Program (CRP). If a farmer's bid is accepted, the farmer enters into a 10-to-15-year contract with the government, under which he/she agrees not to plant on a certain acreage without the Secretary of Agriculture's approval; in return, the farmer receives an annual payment.

Associations and Commissions. The government plays a significant role in the wheat-growing industry largely because farmers asked for assistance, and there are several organizations through which farmers can voice their concerns. The National Wheat Council (NWC) was formed in 1965 to coordinate the activities and interests of the wheat complex as a whole. The National Association of Wheat Growers (NAWG) was organized 15 years prior to the NWC as a nonprofit organization designed to promote the specific interests of wheat farmers. It acts primarily as a lobbying organization, focusing on legislative matters. The group also funds research on improving the quality and yields of American wheat and works in coordination with other wheat industry associations in market promotion. In addition to this national institution, there are many wheat associations and commissions at the state level as well. State associations are involved in state policy, while commissions are nonpolitical bodies that are supported by a fee automatically charged against each bushel of wheat sold in a state—the county elevator operator usually acts as a collection agency. Commissions also administer research, education, and promotion programs. Because of the success of wheat-price support programs, the National Farmers Organization (NFO)—which is a prominent bargainer for other commodities—has not become a major player in the wheat-growing industry.

Farmer Cooperatives. Although the majority of farms are nonintegrated, and the need for farmer cooperatives has diminished with the steady support of the government, such joint venture groups still make up a substantial portion of American wheat farming. In this type of common-ownership organization, farmer members pool their crops and store them in their own cooperative-owned elevators. Farmer-cooperative commission agents then sell the wheat, in many cases, to farmer-cooperative terminal elevators. The attempts by farmer cooperatives' to control the marketing and processing channels have also brought about a few farmer-cooperative exporters and flour millers.

Background and Development

Wheat was introduced to North America by explorers, traders, settlers, and soldiers in the sixteenth and seventeenth centuries. Spanish wheats were cultivated in the southeast, and British and French wheats were produced in the northeast. The first permanent American wheat cultures were developed at the Jamestown colony in Virginia and at Plymouth, Massachusetts, in the early 1600s. New York was the largest wheat-producing state until the late nineteenth century. The center of the wheat industry shifted to new territories as progress was made in railway construction and farming mechanization. In the midwestern wheat belt, the wheat economy developed into its present form, with railroad and commissions agents and, eventually, farmer cooperatives, overseeing it from production to consumption.

In the first part of the twentieth century the technological revolution affected every phase of wheat operations, and economies of scale and specialization strategies began to develop. Together with increases in domestic and foreign demand, the industry developed rapidly. It was not until after World War II, however, that the government began to intervene and established itself as an important "market" for wheat.

The American wheat-farming industry has followed the general agricultural movement of consolidation and reduction. In recent decades, both the number and size of U.S. wheat farms has been decreasing. Most importantly, the proportion of tenant operators has been increasing, and that of owner-operators has been decreasing. Still, even with yields rising almost annually, production leveled off, and supplies have generally been down.

There has been a trend toward less government involvement in the agricultural sector as a whole, and wheat farmers generally viewed this optimistically. The year 1996 ushered in a new era of market-dependent farming after Congress passed the "Freedom to Farm" bill, which curtailed government involvement by gradually reducing farm subsidies over a seven-year period set to end in 2002. This bill allowed farmers to sow as many acres as the market dictated, without having to rely on government planting stipulations. Still, the government planned to maintain some control to avoid surplus or shortage crises. Wheat growers were encouraged by the increasing domestic demand for wheat since 1970. In 1993, the per capita level of consumption increased to its record high of 143 pounds. Furthermore, 1995-96 period brought the industry some of its highest prices ever, averaging $4.55 per bushel from almost 70 million acres with a yield of 35.9 bushels per acre.

High wheat production in the United States and globally since 1995, along with a weak demand, drove down prices in the late 1990s. As a result of the high yields in 1998, wheat prices failed to break $3.00 per bushel for the first time since 1990. At this time U.S. wheat supplies were at their highest level since 1987. In the fall of 1998, the USDA announced wheat donation programs to needy countries in an effort to curb the excess stock.

The estimated cash value of wheat supplies in 1998 was $6.9 billion, down from $8.6 billion in 1997. The lower value of wheat was primarily due to the Federal Agriculture Improvement and Reform Act of 1996 (commonly called the Farm Bill). Since the bill allowed greater flexibility for farmers to respond to market price and demand changes, the USDA estimated that farmers planted the lowest wheat acreage in more than 10 years in 1998. Wheat farmers' stocks from previous crops were high, thus demanding a lower planting. Despite a lower value, wheat was still the third largest cash crop in the United States during the late 1990s.

Lower acreage and yields were projected by the USDA to reduce the U.S. wheat output in 1999 to the lowest level since 1973. Producers were encouraged to switch to other crops or leave more land fallow, due to lower returns on their crops. Globally, wheat production was expected to be down, as major wheat exporters' supplies were large.

Current Conditions

Amid slack demand, U.S. supplies of wheat were dropping in the early 2000s. According to USDA projections, production levels fell from approximately 2.2 billion bushels in the 2000-01 season to 2.0 billion bushels in 2001-02 season. Over the same time period total wheat supplies (which include stocks of wheat already on-hand and imports) fell from 3.4 billion bushels to 2.9 billion bushels, respectively. Bad weather reduced overall wheat yields in 2001-02 period. After record yields in the 1998-99 season (43.2 bushels per acre), yields decreased to 42.0 bushels from 1999 to 2000, and 40.2 from 2001 to 2002. As supply levels decreased, the season-average farm price for wheat was projected to rise from $2.62 per bushel in the 2000-01 season to between $2.75 and $2.85 in the 2001-02 season.

USDA projections reveal that the majority of U.S. wheat consumption occurred in the category of domestic use (1.3 billion bushels). The second largest category was food, accounting for some 945 million bushels. Feed and residual uses ranked third, at 225 million bushels.

A major agricultural industry development took place when the Farm Security and Rural Investment Act of 2002 was signed into effect. Also known as the 2002 Farm Bill, this legislation gave wheat farmers access to marketing loans, as well as both direct and countercyclical payments, according to the USDA. Signed on May 13, 2002, this legislation is effective for a period of six years. It replaces 1996 legislation that intended to decrease farmers' dependence on government assistance.

Consumers' Research Magazine criticized the 2002 legislation for its potential negative impact on international trade, explaining that "The new United States farm bill not only will be bad for taxpayers and consumers, but also will seriously undermine the United States' position in future trade negotiations. Despite the United States' commitment to reduce agricultural subsidies during the last multilateral trade round, the new farm bill will increase support for the agricultural sector by about 80 percent over the last farm bill, amounting to an additional $82 billion over the next 10 years."

Workforce

A noteworthy development in the American wheat-farm workforce was the growing numbers of tenant operators, farmers who cultivated their wheat on rented land. Approximately 15 percent of all wheat was produced through tenantries, while only 35 percent was produced by full ownership farmers. Another significant development is the aging of the wheat-industry's workforce. The largest numbers of wheat producers are between the ages of 55 and 64. Moreover, while the number of farmers over age 64 is increasing, the number under 35 is decreasing. As the industry has grown more and more mechanized, young people in wheat-farming communities have had to find other types of employment.

America and the World

U.S. wheat growers produce much more wheat than the domestic market can consume; consequently, they market their wheat aggressively to other countries in order to sustain themselves. Although the United States is still the number one exporter of wheat, its market share has been reduced dramatically since the 1970s. Both China and the former Soviet Union, for example, were expected to reduce their purchases of U.S. wheat by between 25 percent and 40 percent in the 1990s. This development has forced the United States to seek out other major markets.

In 2001 and 2002, Nigeria and the European Union were importing higher levels of wheat from the United States, according to the USDA. However, at that time the nation's leading international markets included Mexico, Egypt, Japan, and the Philippines. In that same period, the USDA projected that exports of U.S. wheat would reach their lowest levels since the mid-1980s, falling about 8 percent from the previous year. This decline was attributed in part to competition from other nations, including Syria, the former Soviet Union, Australia, and Eastern Europe. Decreased domestic output also factored into this situation.

Two major developments in U.S. wheat exportation occurred at the end of the twentieth century. In late 1998, Brazil agreed to re-open its market to U.S. wheat. Closed to U.S. wheat importation since 1996, Brazil lifted the embargo after a series of negotiations with the USDA. In mid-1999, President Clinton lifted U.S. sanctions on food and medicine for Libya, Sudan, and Iran. As a result, Libya bought 16,000 tons of wheat in late 1999.

Trade Expanding Provisions. An important program geared toward international trade in wheat was the Export Enhancement Program (EEP), under which the government offered subsidies to domestic exporters. Although these subsidies were available (under certain guidelines) to exporters of any commodity, they have been used primarily to counteract European Community (EC) competition in wheat and wheat flour. The United States also offered loan guarantees to foreign purchasers of U.S. wheat and under Public Law 480 (or the 1954 Food for Peace Program) provided some surplus wheat to low- and middle-income countries through subsidized sales or as donations. In return, the revenue the country generated went toward specific developmental projects. Public Law 480 funds were also regularly used to support wheat farmers' associations and commissions. There was a smaller Food for Progress program (Section 416 of the Agricultural Act of 1949) geared toward the implementation of market-oriented agricultural reform in less wealthy countries as well. These programs were all under constant scrutiny of American wheat farmers to ensure that they continued to generate business for them.

Research and Technology

Land grant universities like Texas A&M and Kansas State University perform a great deal of research that has been very successful in developing stronger strains of wheat and more effective chemical fertilizers. Yields are expected to continue to rise as a result of this work. Increasingly, however, concerns for the environment are pushing researchers away from sheer yield growth projects. Instead, researchers have been working to develop ways to maintain farmers' profitable yields while lessening their dependence on chemicals. In addition, droughts and sun-scorched farms have led to international nonprofit research efforts for enhancing the productivity, profitability, and sustainability of wheat and corn and for developing a wheat hybrid that is more heat resistant. Theoretically, such a wheat hybrid would alleviate some of the capriciousness involved in growing wheat.

Further Reading

Carini, Maureen. "Outlook Tempered by Weak Worldwide Demand." S&P's Industry Survey, Agribusiness Industry Survey, Vol. 1, 29 July 1999.

Economic Research Service, U.S. Department of Agriculture. "Briefing Room, Wheat: Background." 26 December 2000. Available from http://www.ers.usda.gov .

——. "Briefing Room, Wheat: Policy." 25 September 2002. Available from http://www.ers.usda.gov .

——. "Briefing Room, Wheat: Trade." 28 June 2001. Available from http://www.ers.usda.gov .

——. "Key Topics, Wheat." 21 June 2002. Available from http://www.ers.usda.gov .

——. "Record U.S. Wheat Yield, Large Stocks Pressure Prices." Agricultural Outlook, August 1998. Available from http://www.econ.ag .

——. "U.S. Wheat Supplies Remain Large in 1999/2000." Agricultural Outlook, August 1999. Available from http://www.econ.ag .

——. Wheat Outlook/WHS-1202, 12 December 2002. Available from http://www.ers.usda.gov .

——. Wheat Yearbook/WHS-2002, March 2002. Available from http://www.ers.usda.gov .

Frey, David E. "Major Breakthrough in Libya." 17 November 1999. Available from http://www.smallgrains.org .

Rippel, Barbara. "Farm Bill Undermines Open Trade—and Consumer Welfare." Consumers' Research Magazine. June 2002.

United States Department of Agriculture. "Glickman Announces Largest Wheat Purchase Ever by CCC." 26 March 1999. Available from http://www.usda.gov .



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