Most producers have calculated the per acre cost to produce 2009 wheat. Producers with 35 bushels per acre average wheat yields have variable cost estimates between $140 and $220 per acre (the $220 per acre cost included $40 cash rent). Without a land charge, the average cost per acre is about $180.
The range of break-even prices would be between $4 and $6.29 per bushel. The average break-even price, before including a land charge, is about $5.14.
Per acre costs may be known, but per acre yields are not. During the last three years, some land that averages 35 bushels per acre produced zero bushels per acre in 2007 and 44 bushels per acre in 2008. About 70 percent of the time, yield is expected to vary about 20 percent or be between 28 bushels and 42 bushels for 35 bushel per acre average land.
With the exiting drought conditions in most of the hard red winter wheat area, per acre yields are expected to be below average. Break-even prices will not be between $4 and $6.20. At the low yield (28 bu), break-even prices would be between $5 and $7.86.
At this writing, the KCBT July 2009 wheat contract price is $6.16. In the last two weeks, the KCBT July contract price has increased 62 cents. Continuing drought conditions and the decline in production expectations have been the driving forces.
Elevators in central Oklahoma and the Texas panhandle are offering 2009 harvest forward contracts with the price based on the KCBT July wheat contract price minus about 80 cents ($6.16 - $0.80 = $5.36). With below average expected yields, the price will only cover the per acre costs of a few producers.
Another price uncertainty is new government policies and changes in current policies that impact demand. For example, the Obama administration announced that the treasury will buy $300 billion in treasury bonds over the next six months. An immediate market effect was a decline in the value of the dollar against major currencies from 87.35 to 83.40 (-4.5 percent).
This, in effect, lowers the export price of wheat and other exportable commodities. After the announcement, wheat prices declined 22 cents — go figure. Wheat prices increased 23 cents the next day. A relatively lower dollar value has little short-term affect. The long-term effect should be an increase in export demand.
As prices increase, producers would be wise to remember that wheat and feed grain stocks are relatively high. The wheat stocks-to-use ratio (ending stocks divided by use) is projected to increase from 13.2 percent on May 31, 2008, to 32.2 percent on May 31, 2009. The five-year average is 24 percent.
Hard red winter wheat ending stocks are projected to increase from 138 to 278 million bushels. The HRW wheat stocks-to-use ratio is projected to increase from 14 percent to 31 percent.
For wheat ending stocks to decline during the 2009-2010 marketing year, U.S. wheat production needs to be below 2.1 billion bushels. Allendale projects 2009 U.S. wheat production to be above 2.1 billion bushels.
Corn ending stocks have increased from 1.3 billion bushels in August 2007 to a projected 1.7 billion bushels in August 2009. Relatively high wheat and feed grain stocks will limit how high wheat prices can go.
Producers who have wheat in storage should consider selling wheat on any price rally. If wheat conditions improve (rain), wheat prices will decline.
Central Oklahoma and Texas Panhandle June 2009 wheat prices are expected to be $5.40 per bushel. Favorable growing conditions could result is prices being below $4.75. Expanded drought conditions could result in prices being above $6.
If a producer can’t afford 60 cents price risk and the forward contract price offer is above the cost of production, they may want to forward contract some wheat. This is a year to stagger sales. There is more upside price potential than downside price risk.