Milling & Baking News - November 30, 2004 - 6

E D I T O R I A L

Reading signals from participation in wheat support

t has been some time since participation by wheat
farmers in the various support programs offered by
the federal government has provided signals of possible market developments. This has changed a bit for the
2004 crop, as farmers have chosen to use these programs,
making decisions that provide insights into what they
may be thinking about marketing their crop but also
how these prospects and the programs themselves may
influence acreage devoted to the 2005 crop. A sharply
rising cost of these programs for wheat and also for corn
deserves renewed consideration in light of the focus the
Doha Round negotiations under the World Trade Organization may be giving to strict curbs on payments to
farmers, in spite of claims that these outlays have little relevance to production or marketing decisions. Decoupling
payments to farmers from production decisions, which
was the major goal of the 1996 and 2002 U.S. farm acts,
still has left payments coupled to loan and market levels.
The two programs meriting current attention are the
marketing loan program and loan deficiency payments.
Both relate to the wheat loan rate. Beginning with the
2004 crop, the wheat loan was reduced to $2.75 per
bushel from the all-time high of $2.80 that ruled in the
prior two crop seasons. The decrease in effect reduces
potential payments by 5 cents per bushel.
Loan deficiency payments are made to farmers who
agree to forego loan participation, with the so-called
L.D.P. rate equal to the amount by which the applicable
county loan rate where the grain is stored exceeds the
posted county price determined by the Commodity
Credit Corp. After a very slow start to loan deficiency
payments in the hard winter area, where market prices
at harvest were well above the loan, the subsequent fallback has prompted growers in the spring wheat states of
the Upper Midwest to be relatively heavy participants.
This is a complete reversal of what happened on the
2003 crop when farmers in the Southwest, particularly
in Kansas, received payments on hundreds of millions
of bushels, contrasted with almost none this year.
A similar reversal of last year's experience also rules
in marketing loan participation. This program allows
farmers to borrow against their wheat crop at the county
rate. These non-recourse marketing assistance loans
may be repaid at less than the loan rate plus interest and
other charges whenever the C.C.C. determines the local

market price is lower than the repayment rate. Unlike
the loan programs of earlier years, farmers taking out
these loans retain control of their wheat, while still being responsible for assuring quantity and quality. Loans
may be repaid at any time during the initial nine-month
loan period, and when the loans mature, farmers may
forfeit the wheat to the C.C.C. Unlike earlier years when
vast quantities of wheat moved into government-owned
stocks if market prices were below loan repayment
rates, farmers participating currently mostly repay their
loans at below-loan rates, achieving what is euphemistically called a "marketing loan gain," while avoiding the
buildup of C.C.C. inventories.
Quite heavy loan deficiency payments and active
marketing loan entries by spring wheat farmers make
for a situation different from recent years. Both programs
provide farmers with immediate cash flows that tend to
strengthen holding patterns for wheat by reducing the
need to sell grain when market levels or conditions might
suggest otherwise. It is fascinating to watch the pattern of
applications for L.D.P.s, since this reflects both the need
for cash as well as farmers' judgments of the day when
market prices might have hit bottom. The lower the price
the higher is the L.D.P.
After reaching a peak of $3.8 billion on the 2000 wheat
crop, government payments - marketing loan gains,
L.D.P.s and direct payments - fell to about $1.2 billion
in each of the next two years. The Department of Agriculture forecasts an increase to $1.5 billion in 2004-05
payments on wheat, but the performance of prices and
the participation levels by growers hints of a considerably larger increase in the cost of wheat support.
When combined with even greater expansion in payments on corn, which already are well ahead of the outlay
for the entire 2003 crop, the pressures on the federal budget from supports will be more severe than in some crop
years. Not only does this year strikingly show that farmers have not lost their appetite for participating in generous government programs, but it also hints of pressures
for program changes in a farm program that is scheduled
to last through the 2007 season. Whether that timetable
holds now seems to depend on the willingness of the government to maintain this burden in the face of criticism
that reflects both domestic and international objections to
the largesse of agricultural supports.

Assessing industry status from national bread prices

nyone interested in measuring the status of grainbased foods from a global perspective could find
no better starting place than by examining the
annual compilation by the International Grains Council
of average prices of bread in various countries around
the world. While information is gathered for World Grain
Statistics by a different loaf in each country, the I.G.C.
performs an invaluable service by converting these prices
into U.S. cents per kilogram of 2.2 pounds. Thus, the price
of 95 cents for a one-pound loaf of white pan bread in
America converts into 210 cents per kilogram.
That U.S. price is less than half of the highest national
price for bread and is many times the lowest, putting
American bread in the middle of the global range. It also
makes sense, in view of Iceland's relative isolation and
its lack of domestic wheat production, that the world's
highest bread price, 493 cents per kilogram, is in that

bakingbusiness.com / world-grain.com

nation. That three of the five highest bread prices, Portugal at 407 cents, Finland at 398 cents and France at 358
cents, are in the European Union underscores how the
Common Agricultural Policy boosts prices far above the
international norm. Also in the top five is Zimbabwe, at
360 cents, a country torn politically.
The lowest bread prices in the world are in North Africa, led by Egypt at only 6 cents per kilogram, with Morocco and Tunisia not much higher. In these countries,
governments subsidize bread to win favor with a populace that is downtrodden economically and politically.
Grain-based foods businesses are expanding in these
nations, but for reasons lacking economic plausibility.
The I.G.C. does not provide a bread price estimate for
China. In Russia, a country that once was at the very bottom of retail bread costs, the latest price is 34 cents per
kilogram, still very low, but heading toward reality. MBN
Milling & Baking News, November 30, 2004 / 7

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Milling & Baking News - November 30, 2004

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