Chicago, 9 August 2010

The recent surge in wheat prices to above $8 a bushel has sparked chatter about how a major land-grab for that crop could set off an acreage tussle between corn and soybeans for 2011 production - even before the 2010 crops are out of the ground. But given the decent state of the emerging U.S. corn and soy crops, and that U.S. soybean inventories are expected to nearly double year-over-year as a result, it is highly unlikely that corn and soybeans will be able to match the price fireworks seen in the wheat market lately without a major production hiccup of their own during what's left of the 2010 growing season.

WINTER WHEAT PLANTINGS SET TO SURGE

As heavy rains prevented U.S. farmers from completing 2009 winter wheat seedings last fall, 2010 winter wheat plantings were expected to rebound strongly even before the recent wheat price shenanigans. Now that 2011 wheat futures are above $7 a bushel for the winter wheat harvest slot, it is likely that winter wheat farmers will be doubly motivated to boost output of that crop should conditions allow.

Of course, the weather will once again have a major say in how much producers can actually achieve. Forecasters generally agree that 2010 will feature a busier hurricane season relative to recent years, so spillover rains from tropical events may well soak fields to the degree that latefall fieldwork will once again be curtailed.

Then again, as 2009 was a relatively light hurricane year but featured persistently wet Midwest conditions through October and November, it is possible that a more active hurricane pattern in the U.S. Gulf and Atlantic will draw moisture away from the growing belt and set the stage for an Indian summer during which ample fieldwork can be completed.

In any event, a notable uptick in U.S. winter wheat sowings can be expected that will not only lay the groundwork for fresh supplies in mid 2011, but to some degree also lock up acreage until May of 2011 at the earliest that will prohibit corn plantings on that ground. It is important to note, however, that there is ample land available for winter wheat plantings to rise by 7-10 million acres from last year's stunted levels without there being any meaningful encroachment on highly productive areas usually dedicated to corn and soybean production.

THE PERILS OF LAZY ANALYSIS

There is a common misperception that every acre that is planted to winter wheat represents a highly productive parcel of land that then cannot be used for corn or soybean production. Further, it is widely assumed that the steady rises in corn and soybean acres in recent years, as well as the simultaneous decline in winter wheat production, have been brought about merely by the superior economics of corn and/or soy production relative to wheat - and that that trend can be easily reversed if wheat is at the right price and corn and soybean prices fail to firm up in response.

A superficial look at the trends in question supports that reasoning, as does the strong negative correlation between winter wheat plantings and the combined acreage of corn and soybeans since 1990 as depicted in the chart below. Graphic of corn & soybean acres versus winter wheat acres:

The reality, however, is that winter wheat is grown mainly in arid areas that are not suitable for much else. The long history of 50-something bushel per acre average U.S. winter wheat yields attest to that. Further, those winter wheat acres that are of higher quality are, whenever possible, followed by a planting of soybeans so that the farmer can benefit from having a 'double crop' that year.

And finally, producers in key wheat growing states such as Kansas have deliberately reduced wheat sowings over the last decade in favor of corn in order to diversify production and exploit the booming demand from the ethanol sector. These producers have incurred significant infrastructural expenses to do this, improving irrigation and leveling agricultural areas so that the ground there is now more suitable to row crop production.

In all, this infrastructural shift marks a long term commitment to diversification by those producers, and as such makes it unlikely that a single season's price move in wheat will lead to the shift of those acres back to wheat. Further, even if winter wheat planted acres show a meaningful rise of 2009 levels, there may not be any noticeable impact on the size of the acreage pie recently dedicated to corn and soybean output.

SPRING WHEAT ALSO IN CONTENTION IN 2011

In theory, corn and soybeans will face more direct land competition from spring wheat, due mainly to the fact that all three crops are all sowed during roughly the same period. However, given that spring wheat is primarily planted in the northern plains and only in marginal areas of the corn belt, any real acreage competition will likely take place in the northern United State against crops such as canola and sunflowers rather than against well established row crops in the heart of the Midwest.

CORN & SOYBEANS HARD TO DISLODGE

Despite the likelihood of a rise in winter wheat plantings that may lock up areas of productive land around the fringes of the Midwest, the lion's share of the United States' most productive acres will remain dedicated to some mix between corn and soybeans. Stellar yields and consistently sound returns on investment over the past decade or so indicate that the best corn and soybean growers in the country have started to get the art of crop growing down to a science.

Despite costs of production of corn and soybeans being higher than for wheat by some margin, the resulting higher yields seen in the top corn and soybean regions easily compensate for the higher break-even levels. For instance, corn yields of 180 bushels per acre and above are common in much of Illinois and Iowa, and result in revenues in excess of $770 per acre at current 2011 harvest-slot corn prices of roughly $4.30 a bushel.

Even at the current $7-area wheat prices, winter wheat yields would therefore need to average over 100 bushels an acre on the same land, which would mark a substantial jump over the 55-65 bushels typically seen in that crop in states like Illinois.

Growers there would also need to be prepared to tackle the inherent challenges of mass producing a crop that hitherto had been only a bit player on Corn Belt farms, and overlook the costs already sunk into equipment and infrastructure dedicated to supporting the traditional corn/soybean rotation. Finally, the proliferation of scores of ethanol plants across the top five corn producing states (Iowa, Illinois, Nebraska, Minnesota and Indiana) ensures there is a permanent reminder of relentlessly strong consumption interest right on corn growers' doorsteps that would need to be overlooked or ignored for there to be any mass shift in crop production away from corn to wheat.

All told, while traders and analysts in financial hubs around the world will surely talk up the chances of high wheat prices sparking an all-out acreage fight between corn and soybeans, producers on the ground in key corn and soybean states are unlikely to pay all that much attention and will stick to what they're good at.

Ends --

By Gavin Maguire, Reuters market analyst. The views expressed are his own.