Wheat offers little opportunity for breakeven prices for the next two years say Oklahoma State University agricultural economists

Wheat offers little opportunity for breakeven prices for the next two years, say Oklahoma State University agricultural economists.

Doom and gloom pervade Oklahoma outlook conference

Commodities show little profit potential Economic outlook gloomy for 2017 Crop losses would reduce burdensome supply

It was a dark and gloomy fall: Farmers across the Southwest rubbed bloodshot eyes, rechecked computer calculations, reviewed Extension budgets one more time, and threw up their hands in consternation.

Nothing looked promising — not cotton, not corn, not cattle, not grain sorghum, certainly not wheat, and not quite canola (although it did show a shallower loss).

As farmers look over crop budgets, market outlooks, and production cost estimates this fall and winter in preparation for spring planting, they don’t find much reason for optimism. Commodity prices remain low, burdened by massive ending stocks and sluggish demand; production costs may be coming down, but at a rate that makes even a snail look zippy.

Even recent good news from the USDA, showing upward revisions of net farm income projections for 2015 and 2016, comes with a caveat: While 2015 improved a lot, 2016 improved little and is still projected to be much worse than 2015 and earlier years.

The situation may be even worse in Oklahoma, says Rodney Jones, Oklahoma State University agricultural economist, who was a panelist at the recent OSU Rural Economic Outlook Conference on the Stillwater campus. He discussed the outlook for typical Oklahoma commodities and the current state of the ag economy.

AG’S FINANCIAL WOES

“In the most recent survey, more than 7 percent of ag loans are experiencing major or severe repayment issues,” he says. “That’s up 4 percent from last year. And 80 percent of surveyed lenders indicate a spillover into rural communities,” which shows that the farm cash flow decline affects equipment sales and other businesses.

The economic downturn is a concern, Jones says, but “nowhere near the level of the 1980s.”

Looking at commodity markets, he says, “Profit margins continue to weaken, but vary by commodity.”

Corn has been a losing proposition for average producers for the past two years, and soybeans offer no better than a 50/50 chance of profit. “We see no chance of a profit with wheat,” Jones says. “The price is well below the cost of production — even for a few producers who have exceptionally high yields, it’s still hard” to show a profit.

Cotton looks bad going all the way back to 2013, he says, and the outlook for the cattle feeder industry is “dismal.” Cow/calf operations dropped off in 2016 after being a bright spot in 2014 and 2015. Jones says hogs had been a positive, “but prices dropped recently.”

Oklahoma farmers depend on several of these commodities for income “We produce a lot of wheat and a lot of cotton,” he says. “The 2016 wheat crop was very good, but not as good as in Kansas and other places. Kansas made 80 to 90 bushels per acre, compared to 50 to 60 bushels for Oklahoma producers. We raise a lot of cattle, too.”

DEPRESSED FARM INCOME

Those dismal prices have done a number on farm income. “We saw very strong balance sheets in 2014,” Jones says, “but we witnessed an average 2.4 percent decrease in net worth in 2015. Repayment capacity measures are worsening rapidly.”

In many cases, cash reserves have disappeared, and producers are taking on more debt, a lot of it short-term. The situation may be bad enough in some cases that farmers will consider the “shutdown” option rather than continuing to produce crops. “That’s a very real concern this year,” he says.

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Wheat has been hit hard, forcing some producers to consider backing off the crop for a year or re-evaluating the wheat-for-grain only option.

Kim Anderson, Extension marketing specialist, says wheat prices are likely to remain low for the next two years, but he cautions growers against eliminating necessary production inputs that enhance quality.

“We can’t stand a low quality wheat crop. We have 70,000 bushels of low quality feed wheat we can’t sell. And we have to have fertilizer, herbicides, and fungicides. We could pick up an extra 50 cents for quality, maybe inch up to $4.10.” At that price, producers would still be looking at a loss.

Anderson figures 35 bushels per acre wheat would need $4.86 to break even. Bumping yield to 40 bushels would lower break-even only slightly, to $4.25, still too little to see a profit with markets holding close to $3 a bushel.

METICULOUS RECORDS

“We might see wheat reach break-even prices next year,” Anderson says. He recommends wheat farmers do some soul-searching to work out production and management strategies. “It takes meticulous records to do that. Records are an important management tool.” 

Canola, if not exactly a shining star, could be a somewhat less drab crop option, Jones says. “My rough calculations show wheat planted this year has about a 20 percent chance of returns above break-even. Canola planted this fall has a 40 percent to 50 percent chance of returns above break-even.”

Leaving wheat ground open may be another option worth considering. “Waiting until spring may yield a higher probability of return above break-even (planting soybeans, for instance),” Jones says. He cautions producers, however, that waiting and planting a summer crop may increase risk.

Producers should evaluate management options, he says. Consideration should include managing cash flow, managing assets, and managing liabilities. Cash flow management may require a close look at family living expenses, supplemental income, delaying purchases, and negotiating land rents. “The ability to respond will be farm-specific,” Jones says.

SELLING ASSETS

Asset management may include selling off least-productive assets, including some equipment, although values may be diminished. “Delay replacement purchases and lease out under-utilized equipment.”

Renegotiating loans to interest-only payments for a year may be an important option for managing liabilities. “Refinance at lower rates,” he advises. Locking in interest rates and evaluating crop insurance options can help manage risk.

“The big question is, how long will the downturn last? Right now, there is no end in sight — but costs continue to come down only gradually. History suggests a three- to four-year downturn, but we also have to determine when it started.”

Working through the massive ending stocks of commodities will be crucial in moving prices back above break-even, Jones says. Several conference speakers noted that consumer demand would not be adequate to work though those stocks, and that a crop loss somewhere in the world will be necessary to turn the market.

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