August 4, 2016
At this writing, the KC July17 wheat contract price is $4.70. Some elevators are offering forward contracts for June 2017 delivered wheat for the KC July17 contract price plus a minus 95 cents. Wheat may be contracted for harvest 2017 delivery for $3.75 ($4.70 - $0.95).
Wheat-for-grain-only budgets for north central Oklahoma estimate total operating (out–of-pocket) costs to be $194 per acre. This estimate includes a $50 per acre land charge (cash rent). Without a land charge, the total operating cost is $144 per acre.
With an expected yield per acre of 35 bushels and an expected price of $3.75, the total return for producing wheat is $131 per acre. Accounting for $50 rent, the net return would be minus $63 per acre. With zero land charge, the net return would be a minus $13.00 per acre.
With a $50.00 land charge, the breakeven price would be $5.54. Without the land charge, the breakeven price is $4.11.
To generate a positive profit, the price received must be at least $4.11 (no rent) or $5.54 ($50 land charge), costs must be lower, yields higher, or a combination of the three.
If the land is “cash rent,” the first thing to do may be to either renegotiate the rental rate or turn the land back to the landlord. Releasing the land will have long-run farming implications. Some producers will take a $63 per acre loss to farm more land.
Adequate fertilizer must be applied or yields may be below expectations and/or wheat quality may be low, resulting in discounts. Both issues may result in even larger losses than if adequate fertilizer is applied.
Fertilizer costs may be reduced by using “enriched fertilizer strips” and soil testing. Timely scouting of fields for weeds and pests could also result in reduced costs and/or increased yields.
Custom harvesting is estimated to be $35 per acre or $1 per bushel. Producers who own harvesting and hauling equipment may have lower harvesting and hauling costs.
Crop insurance costing $10 (29 cents per bushel) is included. Each producer must decide how much risk they can take. Over time, buying crop insurance has been actuarially sound.
Another method to increase net returns is to produce a quality product by using adequate fertilizer and controlling weeds. Discounts for dockage and foreign material (rye) can reduce the price quickly.
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Another fact that should be considered for the 2017 wheat crop is that the average protein level for the 2016 crop was about 11.2 percent. Most export contracts require 12 percent protein. Areas with relatively high protein could result in a lower basis and a higher cash price.
A review of world wheat production from 2008 through 2016 shows that in seven of these nine years there were record crops. Supply was so high during the 2009/10 crop year that cash prices were below $3.60. At this writing, some local elevator prices are below $3.00.
The 2009/10 stocks-to-use ratio was 31 percent for the world and 48 percent for the U.S. The 2015/16 stocks-to-use ratio was 35 percent for the world and 50 percent for the U.S. Little change in the stocks-to-use ratios is projected for the 2016/17 marketing year.
For prices to go above $5 will require a significant reduction in world wheat stocks (production). About 40 percent of the 2016/17 wheat has not been harvested. There is a small chance that 2016/17 production will be less than expected and prices could increase.
It may be September/October 2017 before there is any chance for prices to be above the costs of production. For hope, read Genesis 41: 46 through 57.
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