Three consecutive short crops have left supplies strained, and at the mercy of weather and consumer demand.
Along with many other crops, organic wheat markets have felt substantially bullish price support since the start of 2021. As with other crops, these price gains have been driven by both challenges unique to organic wheat, and larger factors which have strained agriculture markets overall. Starting with general factors, following COVID-19 driven quarantines and restaurant closures, U.S. expenditures on organic flours, pastas, and breads grew more than 12% over 2020 to $6.4 billion according to Organic Trade Association (OTA) estimates. While demand did subside slightly over 2021, expenditures remained at $6.3 billion, or up $560 million from 2019 according to OTA.
Adding to this period of heightened demand, U.S. organic wheat production has struggled since 2021. Beginning in April 2021, key organic spring wheat producing states experienced drought conditions. By August 2021, 98% of the organic spring wheat acres across Montana, North Dakota, and South Dakota were rated as in severe drought or worse according to U.S. Drought Monitor data. As a result, Mercaris estimates 2021 U.S. organic spring wheat production fell 37% y/y (year over year), to less than 4.5 million bushels.
While drought conditions improved slightly during the fall and winter of 2021-2022, they also expanded east and south. By March 2022, 55% of the organic winter wheat acres across Colorado, Kansas, Nebraska, and Wyoming were rated as in severe drought or worse according to U.S. Drought Monitor data. As a result, Mercaris estimates 2022 U.S. organic winter wheat production fell 8% y/y to 13.1 million bushels. The net impact of the drought conditions over this period was a 3.7-million-bushel decline in U.S. organic wheat production from September 2021 through June 2022, an 18% reduction from the prior two harvests.
Drought conditions improved after June 2022 with less than 14% of organic spring wheat acres across Montana, North Dakota and South Dakota rated as in severe drought or worse as of August 2022. This improvement did boost 2022 U.S. organic spring wheat production 42% y/y to 6.4 million bushels. However, this improvement was not a total recovery, leaving 2022 U.S. organic spring wheat production 10% below 2020 levels. As a result, organic wheat supplies remained fundamentally tight over the fourth quarter of 2022. Furthermore, organic winter wheat acres have trended drier since August 2022. As of December 27, 2022, 47% of the organic winter wheat acres across Colorado, Kansas, Nebraska, and Wyoming were rated as in severe drought or worse, up 3% from the prior year.
From a purchasing perspective, the three consecutive short organic wheat crops have created significant challenges. Supplies of organic hard red winter wheat have been reported to Mercaris as extremely tight in the fourth quarter of 2022, with Northern High Plains FOB (freight on board) farm prices reported at $19.75 per bushel over December 2022. Supplies of organic hard red spring wheat have been reported as limited, but available with limited contracting over December 2022 despite prices for Montana FOB farm prices reaching $19.50 per bushel over the month.
Whether these price levels hold will likely depend on two key factors. First, and likely the most significant in the near term, is weather over the first quarter of 2023. Improvements in soil moisture, and a reduction in drought conditions over the first quarter of 2023, could go a long way to improving the U.S. organic wheat supply outlook, creating room for lower organic wheat prices. However, as of the end of 2022 drought conditions have been paired with extended periods of extreme cold, raising concerns that the 2023 organic winter wheat crop will be reduced once again. These concerns have been reinforced by deteriorating winter wheat conditions in Colorado and Kansas in which 38% and 43% respectively were reported as poor to very poor at the start of December 2022.
The next factor will be consumer demand. It is anticipated that consumer demand for organic wheat products will fall again as consumers continue to return to pre-COVID-19 consumption patterns. Should this trend be compounded by other broader economic downturns, the result would likely be bearish price pressure regardless of supply levels.
In general, organic wheat markets will be keeping a keen eye on weather over the start of 2023. A significant improvement in moisture will be critical to relieving what has become an 18-month long period of tight supplies and elevated prices. However, looking further into the future, demand risks could undermine the market regardless of how much organic wheat is grown.
Ryan Koory is vice president of economics with Mercaris
