The increase in wheat prices relative to the decrease in soybeans and corn has increased interest in Tennessee for planting wheat this fall.
By design or by accident, producers considering wheat have started the financial planning process for 2019. In doing so, there should be a comparison in how wheat will stack up to other crops competing for the same space on that acre of land.
In Tennessee, when we talk about the wheat crop, we generally are also analyzing double-crop soybeans that will follow wheat.
In 2018, Tennessee producers harvested 295,000 acres of wheat, an increase of 20,000 acres from 2017. The recent high acre mark in the last 10 years was 2013 at 575,000 acres followed by 2014 acres harvested of 475,000.
The state average price in 2013 was $7 per bushel with 2014 coming in at $5.63 per bushel. With wheat forward prices for June 2019 being offered at above $6 in west Tennessee in early August, wheat acreage in Tennessee is projected to increase.
What goes into an acre of wheat or how much does it cost to raise an acre of wheat? The answer can vary depending on really how much a producer wants to put into the crop and whether it is being more intensively managed for higher yields.
I would encourage producers to develop their budget based on whether it is going to be intensively managed, more of an average crop or if it is going to be more of a cover crop with the possibility of being harvested if prices go higher and the crop has yield potential. The last option may be harder to accomplish, but there have been a few years it works out.
Seed cost will vary among producers based on whether certified seed is used or bin run wheat seed is used and whether seed treatments are used. Keep in mind, while not impossible, it is more difficult to achieve record yields without first starting with a good quality seed. Good quality seed may come out of the bin but should be cleaned and have germination checked for viability.
The first table looks strictly at the cost on the average to raise wheat based on the University of Tennessee 2018 budget tweaked for current seed and fertilizer costs.
So our basic budget has $230 per acre of variable expenses for wheat with $59 per acre of fixed expenses which includes machinery depreciation and interest and management labor.
In 2018, Tennessee state average wheat yields are currently estimated at 63 bushels per acre. Plugging this number in to our five-year average gives Tennessee a 68 bushel per acre average. At this writing, prices for June 2019 delivery can be contracted in west Tennessee for $6.10 per bushel.
If a producer is renting land on a 25 percent share where the landowner receives 25 percent of production and pays no expense except there share of crop insurance cost, then the land cost is $102 per acre bringing total cost to $392 per acre.
There are many different share rental agreements used in Tennessee and this 25 percent share is used for comparison purposes only and is not to be construed to be the appropriate share rent for any given area.
Using the total of $392 per acre generates a breakeven price of $5.75 per bushel and a net return of $24 per acre for wheat only. Keep in mind, that these costs, while including an $8 return to management, do not include any additional owner withdrawals or family living costs. Those cost will vary among operations.
Still, wheat is showing a profit on average cost and at average yields and with prices above breakeven may warrant a start to forward pricing as a part of a producer’s marketing plan.
Unfortunately, double-crop soybeans with a yield of 35 bushels per acre priced at $8.70 per bushel (estimate based on November 2019 futures) show a negative net return of $12 per acre after variable, fixed and land cost come out. Within this estimate is $191 per acre of variable expenses, $52 per acre of fixed expenses, and $74 per acre of land cost (based on the 25 percent share rent). So, while a producer may make some money in wheat, they may give half of it back with double-crop soybeans.
In previous years, we probably saw the opposite, lost money or broke even in wheat while making money with double-crop soybeans that yielded as well as full-season soybeans.
The profit potential does appear to be in whether a producer or maybe the land resource has the capability to make a good yield of double-crop soybeans.
To complete our projection, let’s look at how wheat/soybeans on a per acre basis compare to the main crops in Tennessee — full season soybeans, corn, and cotton.
Each producer should look at and analyze their own numbers for their operation when comparing crop scenarios. In this projection, we are looking at Tennessee average yields and current estimated prices for 2019 harvest delivery.
In reviewing the four crops together, what jumps out to me is the profitability for cotton and wheat/soybeans on owned or cash rent ground as evidenced by Returns Over Variable Costs.
A producer may also want to look at this number if in addition to owned or cash rent ground, there are not any changes to their equipment and their overall fixed cost (mainly on equipment) will not change depending on the crop raised. If that is the case, then wheat/soybeans certainty look like a viable enterprise for 2019 as does cotton.
Producers constantly tell me they have difficulty managing many acres of cotton and wheat/soybeans at the same time as both compete for time, labor, and sometimes equipment. Keep that in mind if you plan to raise both those crops.
What other scenarios should a producer examine? In the third table, I substitute the share land cost for $135 an acre cash rent, again a number for comparison purposes only. I also look at a sensitivity analysis of —10 percent gross revenue and a +10 percent of gross revenue, both including 25 percent share rent as land cost. This change in gross revenue can come from either yield or price changes or a combination of both.
In this quick analysis, I just will look at the net returns, while a producer looking at their own operation would also want to analyze returns over variable.
What is evident to me as I look at this table is why wheat/soybeans can be a viable crop for cash rent as it has a comparable return to cotton and corn.
Full-season soybeans take a hit in this scenario. In the sensitivity analysis, wheat/soybeans and cotton have greater profitability risk at either/or a drop in yields or price, but have a somewhat greater upside on increase in yield or price. Price risk might can be alleviated through a well thought-out marketing plan.
Corn also looks favorable.
In summary, wheat and double-crop soybeans look viable for 2019. The highest profitability may be on cash rent or owned ground.
Producers planting wheat should develop their marketing plan at or before planting to reduce price risk and look closely at taking advantage of prices above their breakeven price.
As with any crop, it should be matched to the land or farm it is best suited for considering among other reasons, land costs — owned, cash rent, or share rent; weed control that will be needed, and timeliness of planting.
Producers should look to make informed decisions on crop selection and economics and use their own production and cost information when making these decisions. Local Extension Agents and or Area Specialists can assist producers in making these informed decisions, give us a call.