For most producers current wheat prices are below both total and variable outofpocket costs of production Higher yields and lower production costs without sacrificing yield may improve the odds

For most producers, current wheat prices are below both total and variable (out-of-pocket) costs of production. Higher yields and lower production costs (without sacrificing yield) may improve the odds.

Making money with low wheat prices nearly impossible

World wheat consumption was 26 billion bushels in 2014/15, and is projected to be 26.3 billion bushels in 2015/16. This implies that 2016/17 wheat marketing year production must be below 26 billion bushels for stocks to decline and for prices to increase.

At this writing, Oklahoma and Texas cash wheat prices mostly range between $4.17 and $4.41. Wheat may be forward contracted for 2016 harvest delivery between $4.62 and $4.87. For most producers, current prices are below both total and variable (out-of-pocket) costs of production.

Making money with prices below $5.00 is nearly impossible.

The cost of production varies by field, farm, county, and state. Assuming an average yield of 30 bushels per acre (the Oklahoma average is near 28, and the Texas average is 30), variable cost of production is estimated to be $150 per acre, with a total cost of production of $175. Breakeven for the variable cost per bushel would be $5.00 ($150 ÷ 30 bu.), and for the total cost would be $5.83 ($175 ÷ 30 bu.).

Using a 2016 forward contract price of $4.75, the breakeven yield to cover variable cost per acre would be 31.6 bushels ($150 ÷ $4.75), and would be 36.8 bushels ($175 ÷ $4.75) to cover total cost.

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Using the current 2016 forward contract harvest price ($4.75), covering variable cost may be achieved by increasing yield by 1.6 bushels per acre (5 percent). Covering the total cost of production requires a 6.8 bushel (23 percent) increase in yield.

Another way to reach breakeven is to reduce variable costs (without reducing yield) by $7.50 per acre. To cover total cost, the cost would need to be reduced by $32.50.

MARKET DETERMINES PRICE

A producer can do very little to affect the price received — the market determines the price. Producers do have some control of costs and yields.

The good news is that the market price covers the cost of production about 87 percent of the time. Producers must prepare for lean years. During the 2008/09 and 2009/10 wheat marketing years, wheat prices were below the cost of production for about 23 months.

Except for December 2014, wheat prices have been below the total cost of production since September 2014. Unless something drastic happens to the Southern Hemisphere’s wheat crop (Argentina and Australia), wheat prices may not go above $5.75 before August or September 2016.

For the period 2007 through 2012, average annual world production was 24.8 billion bushels. During the period 2012 through 2015, three record world wheat crops were produced in a row —26.3, 26.7, and 26.9 billion bushels.

WORLD RECORD STOCKS

The result is projected record world wheat ending stocks of 8.4 billion bushels, and a relatively high world wheat stocks-to-use ratio (32 percent vs. 28.5 percent average).

World wheat consumption was 26 billion bushels in 2014/15, and is projected to be 26.3 billion bushels in 2015/16. This implies that 2016/17 wheat marketing year production must be below 26 billion bushels for stocks to decline and for prices to increase.

Unfavorable weather during January through May 2016 could have a $1.00 to $1.50 positive impact on wheat prices before July 1, 2016. Significantly higher prices ($1.50 or more) require well below average foreign production, which would not be known until July or August 2016.

Research has shown that managing cost has the biggest impact on profit, and that managing yield has the next highest impact. Times do occur when making a profit is simply not possible.

Producers must prepare for times of low prices. They must also not allow low prices to affect production. Higher prices will occur “like a thief in the night.”

 

To make a profit from relatively high prices, producers must have commodity to sell.

Goltry, Oklahoma Daily Cash Wheat Prices.
   
   
 

 

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