Higher fuel, fertilizer and chemical prices have increased variable (out-of-pocket) wheat production costs to nearly $100 per acre. Conventional tillage and no-till per acre variable costs are about the same. Note that total cost of production (variable plus fixed) is about $10 per acre higher for conventional tillage wheat than for no-till wheat.
Depending on tillage practices, fuel costs make up between 6 and 16 percent of variable costs. Fuel, oil and lube costs for no-till wheat were estimated to be $5.75 per acre compared to $16.40 for conventional tillage wheat.
Chemical costs for no-till wheat were estimated to be $24.10 per acre compared to $3.50 per acre for conventional tillage wheat. Because less tillage results in increased weed and insect pressure, herbicide and pesticide costs are higher for no-till wheat.
Fertilizer costs were estimated to be $20.47 per acre for conventional till wheat compared to $25.57 with no-till. The budget contained anhydrous ammonia for conventional tillage and urea for no-till.
Average HRW wheat production in Oklahoma and the Texas panhandle is about 32 bushels per acre. Above average production requires increased fertilizer and fuel costs. Higher fertilizer application is required for the increased bushels, and harvest costs increase with production.
Given $100 per acre variable costs and 32 bushels per acre production, the per-bushel breakeven price is $3.13 ($100 divided by 32 equals $3.13).
At this writing, the Kansas City Board of Trade July 2006 wheat contract price is $3.57. The average basis in central Oklahoma and the Texas panhandle is about a minus 34 cents per bushel. This implies that the market is predicting $3.23 per bushel for delivery during June 2006 ($3.57 - $0.34).
During the last five years, the central Oklahoma and Texas panhandle basis during June have ranged from minus 20 cents to minus 44 cents. Some elevators will forward contract wheat for 2006 harvest delivery for $3.17 per bushel (minus $0.40 basis).
Needed for profit
The breakeven production price ($3.13) is relatively close to the price currently being predicted by the market ($3.23) and the forward contract price ($3.17). To make a profit, producers must produce 32 bushel per acre wheat at a below average cost, produce above average yields without a like increase in costs, or depend on the market offering a higher price.
Producers do have some control over production practices that have the potential to reduce variable costs or increase yields. Producers have little control over prices. Thus, the way to make a profit in today's market is to manage costs and to use production practices that increase the odds of above-average production.
For the 2006/07 wheat price to be significantly higher than the $3.20 being offered, U.S. wheat ending stocks must be lower than the projected 624 million bushels and/or 2006/07 U.S. wheat production must be less than 2.1 billion bushels.
United States wheat marketing year supply has been set at 2.78 billion bushels. Thus increased exports are about the only thing that will result in lower ending stocks.
World wheat supplies are relatively tight. Any decline in world wheat production will have a relatively large impact on wheat prices. Argentina and Australian wheat production will be the major factors on changes in world wheat supplies and on U.S. wheat exports.
Fuel, fertilizer and chemical costs have increased for all of the world's wheat producers. Higher costs will result in less planted acres and/or less fertilizer and chemical use. Higher costs increase the odds that 2006/07 wheat production will be less than 2005/06 production and increase the odds of higher prices.