“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.” (Sun Tzu, The Art of War).
The market is the enemy. If you do a cost and returns budget for your farm — or better yet, for each field — you will know yourself. A cost and returns budget for 2015 wheat production for a northern Oklahoma farm is shown in Table 1.
Completing a cost and returns budget requires accurate records for yields (production) and costs. Knowledge of past prices and information about price expectations are also required.
Gross return is $150 per acre; variable cost is $181 per acre; and returns above variable costs are a minus $31 per acre. The wheat will be sold in three lots: one-third at harvest, one-third in late September/early October, and the final third in the November/December period.
The $4 projected price is a combination of an expected harvest price of $3.75 and a projected $4.25 December 2017 price. Price projections are based on the current price—adjusted for the current supply and demand situation—plus projections for marketing-year 2017/18 supply and demand situations.
At this writing, the KC July wheat contract price is $4.15, and the harvest forward contract basis is minus 90 cents. Wheat may be forward contracted for $3.25. It is projected that with above average test weight and protein, the basis and the KC July 2017 contract price will increase, and the June 2017 cash price will be $3.75.
It is also projected that with above average yields and with low protein and/or test weight, the cash wheat price could be $2.50 at harvest. Relatively low yields with good test weight and protein could result in cash prices in the $4.25 range.
On this example farm, two-thirds of the 2017 wheat harvest will be stored. It is noted that the U.S. and world wheat supply situation will start with record stocks. The world’s five-year average production is 26 billion bushels (27.6 billion bushels in 2016/17), and average use is 25.7 billion bushels (27.1 billion bushel use in 2016/17).
If world wheat production is 26 billion bushels (five-year average), and use is 25.7 billion bushels (five-year average), the 2017/18 wheat marketing year world ending stocks would be 10.0 billion bushels (an increase of 300 million bushels). This implies that for wheat prices to increase above current levels, world wheat production must be less than use.
Farm production history, combined with current field moisture and crop condition, was used to project production at 37.5 bushels per acre. Records show that the yield could be as low as 25 bushels, or as high as 48 bushels.
Variable (out-of-pocket) costs totaled $181 per acre (Table 1). The highest cost is rent, at $40 per acre. Fertilizer cost is $35 and custom harvest is $34.50. Pesticide/herbicide costs are estimated to be $19.19. Other costs totaled $52.31.
For all practical purposes, these costs are locked in for the 2017 crop. A question to be answered later is, “Can costs be lowered?” An easy answer is higher yields.
An expected loss of $31 per acre has to change, and the change has to come from you and/or the enemy.
|Table 1: 2017 Dryland Wheat Enterprise Budget - Grain Only
2264 acres farm
Robinson Field # 2, 148 acres
|OPERATING INPUTS||Units||Price||Quantity||$/Acre||of Cost|
|Annual Operating Capital||Dollars||5.00%||60.86||$3.04||2%|
|Machinery Fuel, Lube, Repairs||Acre||$17.30||1||$17.30||10%|
|Total Operating Costs||$181.00|
|Returns Above Total Operating Costs||$(31.00)|
|Source: Trent Milacek, Area Economists, Enid OK|