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Costs, price rising: Budget guidelines for 2006-07 wheat

It seems like we just finished harvesting the 2005-06 winter wheat crop, and have already started getting questions regarding the profitability of planting wheat this fall.

According to the USDA, Arkansas, Mississippi, and Tennessee all posted record state average wheat yields. Given that success and the current price levels for wheat, producers will likely respond with more acreage this fall — given the right planting conditions.

From recent conversations with local seed dealers, wheat acreage in Arkansas may double in fall 2006. In making the decision to grow wheat, producers should make time to construct a budget. The following paragraphs include some guidance on estimating 2006-07 wheat production costs.

Yields, prices, and production costs will undoubtedly vary from year to year and farm to farm. The accompanying budget provides three different yield levels which were common in the 2006 Arkansas Wheat Research Verification Program.

The expected price per bushel of $3.80 reflects the July 2007 CBOT wheat futures price in mid-August and a 48-cent per bushel negative basis.

The budget does not include an estimate for direct payments specified in the 2002 farm bill. In completing a whole-farm cash flow analysis, government payments such as direct or counter-cyclical payments should be considered.

Two of the most significant wheat production costs are seed and fertilizer. These two inputs can account for roughly half of all variable costs in wheat.

Seed costs are expected to be higher this fall — perhaps as much as 25 percent higher. In our budget, seed expense is estimated at $24 per acre. This is based on an average seeding rate of 120 pounds per acre and a seed cost of $10 per 50-pound bag.

Fertilizer costs include 220 pounds of urea (46 percent) and 100 pounds of phosphate (46 percent P2O5). Dealer surveys around eastern Arkansas indicate the current cost per ton of urea (46 percent) is approximately $260. This is about 13 percent lower than at this time a year ago. Phosphate prices have not fallen as much, but are about 5 percent less than this time last year.

Wheat fertilizer application charges are included in custom hire expense. It is worth mentioning at this point that fuel prices have affected custom application rates.

Common rates for custom ground application range from $4.50 to $5 per acre. The per acre cost of aerial applications varies around the state. In some areas, $6 per acre is common for liquid application and application of less than 100 pounds per acre of dry material. For more than 100 pounds of dry material applied per acre, rates are generally 5.5 cents per pound.

In 2006, Arkansas Wheat Verification cooperators either did not apply herbicide or applied as much as $9.51 per acre. A herbicide program for wheat production commonly includes a single application of Hoelon 3EC or Harmony Extra, which may range in cost from approximately $3.50 to $6.50 per acre.

The sample budget includes a single application of Harmony Extra (with surfactant) at the rate of 0.5 ounce. Application charges are included in custom hire expense.

No insecticide or fungicide expense is included in the budget, though it may be necessary depending on growing conditions and pest pressure.

Labor is an estimate of all labor expense associated with operating tillage, planting, and harvesting equipment. The hourly wage rate used is $8.12.

A land charge is reported for a 25 percent share rent lease which assumes no cost sharing among the tenant and landowner.

Operating interest approximates the interest that would be paid on a line of credit for purchased inputs. The interest reported is variable costs multiplied by an interest rate of 8 percent times a half year for the term of the line of credit.

An estimate of per acre fixed costs ($20.62) is included to reflect the cost of ownership related to tractors, implements, and combines.

Total costs for the three yield scenarios range from $195.13 to $217.25 due to the effect yield has on hauling expenses. Total cost per bushel varies from $3.55 to $2.90 depending on yield. Given current futures price levels, returns over total costs are positive under the yield assumptions in the budget.

Profitability in wheat production depends on a variety of factors. Yield can be a major determinant of profitability in wheat production. Cost management is equally important. For more information on farm level economic decisions, contact a local county Extension office or the authors of this article.

The Wheat Research Verification Program is conducted by the University of Arkansas, Cooperative Extension Service with checkoff funding from Arkansas wheat producers. Funding for research is administered by the Arkansas Wheat Promotion Board.

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