Factors to use in wheat production/pricing decisions

Factors to use in wheat production/pricing decisions

Wheat farmers face balancing act when pricing wheat Production cost currently higher than available wheat prices

Oklahoma Cooperative Extension Service budgets indicate that total operating (variable or “out-of-pocket) costs for wheat only (no grazing) are $176 per acre for 35 bushels per acre. Total (operating plus fixed) cost per bushel is $5. OCES budgets show fixed costs to be $19, for a total cost of $195 per acre. Using 35 bushel average yield, the total cost per bushel is $5.57.

For 2014, USDA/ERS Prairie Gateway wheat budgets estimate total operating costs (including labor, taxes and insurance, and farm overhead) to be $146 per acre. Using USDA’s Prairie Gateway 2009 through 2014 average yield of 31 bushels per acre, total operating costs per bushel equaled $4.71.

At this writing, wheat may be forward contracted for 2016 harvest delivery for $4.49 at Goltry, Okla., and $4.53 at Perryton. Texas. Farm-delivered wheat to the sub-terminal elevators at Enid, Okla., for harvest 2016 delivery, is $4.68. Forward contract prices are below total operating costs and nowhere near total costs.

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When determining price, the market doesn’t take wheat cost of production into consideration. The market only considers the supply and demand situations — how current demand compares with current supply, and how projected demand over the next few months compares to projected supply.

HIGHEST NET RETURN

Producers sell wheat. What they “market” is land, labor, capital, and management. These assets (land, labor, capital, and management) should be allocated to the production enterprise — that is, projected to produce the highest net return. This could be wheat, cattle, wheat and cattle, corn, sorghum, etc. Projected prices (often based on 5- to 10-year average price) are used when comparing the enterprise (production) alternative.

Costs of production may also be used when deciding whether or not to forward price (harvest price) wheat. There just aren’t very many circumstances where expected production would be forward priced at prices below operating costs (about $5), and probably not below total costs.

After wheat is in storage, the major determinant of when to sell is the comparison of the current price to projected prices.

For example, on June 22, 2015, Oklahoma and Texas prices were between $4.62 and $4.72 in the Texas Panhandle, and $4.72 and $5.07 in Oklahoma. Points to consider were that the seasonal price trend is normally set during the August through September time period. There had been two record world crops in a row and a third record was projected. The index of the value of the U.S. dollar had increased from 80 to 95 (19 percent).

MORE DOWNSIDE RISK

On June 1, 2015, the December 1 cash wheat price was projected to be between $3.30 and $6.50. There was more downside risk than upside price potential. The June 22 cash wheat price was near the operating cost of production. The sell decision should have been based primarily on how much price risk the producer could take — not on the cost of production.

From October 2008 through June 2010, wheat prices were mostly below total cost of production. From June 2009 through June 2010, prices were below the operating costs of production.

The decision to sell wheat that is currently in storage is a function of price expectations and risk management — not cost of production. Pricing unharvested wheat, on the other hand, should be based on cost of production and risk management. And production decisions should be based on cost of production and price expectations.

 

Garfield County Oklahoma Wheat Budget: Grain Only

OPERATING INPUTS

Units

Price

Quantity

$/Acre

 

Wheat Seed

Bu./acre

 $    10.20

1.50

 $         15.30

 

Fertilizer

Acre

 $    32.00

1

 $         32.00

 

Custom Harvest

Acre

 $          -  

0

 $              -  

 

Pesticide

Acre

 $      8.92

1

 $           8.92

 

Crop Insurance

Acre

 $    10.00

1

 $         10.00

 

Annual Operating Capital

Dollars

6.50%

58.01

 $           3.77

 

Machinery Labor

Hrs.

 $    10.50

0.55

 $           5.78

 

Custom Hire

Acre

 $    11.25

1

 $         11.25

 

Machinery Fuel, Lube, Repairs

Acre

 $    38.62

1

 $         38.62

 

Rent

Acre

 $    50.00

1

 $         50.00

 

Other Expense

Acre

 $          -  

0

 $              -  

Total Operating Costs

 

 

 

 $       175.64

FIXED COSTS

Units

Rate

 

$/Acre

 

Machinery/Irrigation

$/value

     
 

     Interest at

Dollars

6.30%

 

 $           5.78

 

     Taxes at

Dollars

1.00%

 

 $           2.45

 

     Insurance

Dollars

0.60%

 

 $           0.95

 

     Depreciation

Dollars

   

 $           9.49

 

     Interest at

Dollars

0.00%

 

 $              -  

 

     Taxes at

Dollars

0.00%

 

 $              -  

Total Fixed Costs

     

 $         18.67

Total Costs (Operating + Fixed)

 

 

 

 $       194.31

Budget prepared by Trent Milacek, OCES Area Economist, Enid, Oklahoma

 
   
   

 

TAGS: Wheat
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