I was asked, “Why would anyone produce wheat when the market is offering a price below the variable cost of production?”
Economic theory supports producing wheat in the short-run, when prices are above variable costs yet below the total cost of production.
If prices are below variable costs of production, growers are paying the market to produce wheat. The situation may be that the budgets represent average production and costs. Research shows a large variation in costs and yield per acre. At $3.75 (what the market is offering for 2017 harvested wheat), some producers are covering variable costs.
Evidence has shown that producers will plant wheat when prices are below variable costs because prices, over time, will average above total costs of production. The problem is that no one knows when prices will increase.
Given the eight to nine month wheat production period, plus six months storage, prices have about 15 months to increase. In addition, a producer can only take advantage of prices that are above production costs if wheat is in the field or in the bin.
Low prices have resulted in farmers taking land out of wheat. Hard red winter wheat planted acres in Oklahoma are the lowest since 1962. Texas winter wheat planted acres are the lowest since 1972. Kansas wheat planted acres are the lowest since 1957. U.S. winter wheat planted acres are the lowest since 1909.
Over the last 20 years, about 78 percent of the hard red winter wheat planted acres have been harvested. The percentage of Oklahoma planted acres that have been harvested is 67 percent. Kansas’ percentage of harvested acres is 90 percent. Texas’ percentage of harvested acres is 50 percent.
Reports indicate that the harvested percentage of 2017 wheat planted acres will be below average. Producers report that more wheat than normal will be grazed out, hayed, and/or disked under for planting summer crops.
Wheat planted acres are down because the market price is below the cost of production; because another commodity may offer a higher probability for generating a profit; and/or the land was left fallow because the odds were too high that the market price would not cover variable costs of production.
Producers who planted wheat and plan to harvest it are deciding whether to apply top-dress fertilizer and/or pesticides or fungicides, if needed.
About 2 pounds of nitrogen are needed for each bushel of wheat. Reports indicate that nitrogen fertilizer may be applied for about 43 cents per pound, or 88 cents per bushel.
The long-term weather forecast is for above average temperatures and average moisture. This outlook may imply that average yields would be expected. If enrichment strips or soil tests show that additional nitrogen is needed to reach average yields, an 88 cents per bushel investment for an additional $3.75 return appears to be a good decision. The same principle may be applied to fungicide applications, if needed.
Wheat prices are relatively low. Wheat planted acres have been reduced. Some planted acres have variable costs of production below $3.75 per bushel. Some planted acres have variable costs of production above $3.75.
Wheat prices will increase to above the total cost of production — producers just do not know when.
But they do know that wheat prices will increase. Therefore, they need to have wheat for sale. They will not have wheat for sale if they don’t grow wheat, even when prices are low.