Commercial elevators in Oklahoma and Texas, at this writing, are offering somewhere around $4 for wheat delivered during the 2018 harvest. Using the five-year Oklahoma yield per acre average (29 bushels), the break-even cost per acre, considering only variable inputs, is $120.
Many producers will have $175 or more per acre variable costs. An additional $15 per acre for fixed costs (land payments, depreciation, taxes, insurance, etc.) brings total costs to $190. Producers can’t stay in business losing $74 per acre ($190 - $116) with $4 wheat and 29 bushels per acre yield,
To continue to produce wheat, producers must (1) have a higher price, (2) produce more bushels per acre, and/or (3) lower production costs. I have said that if producers grow a quality product, price will take care of its self, but in today’s market, that is not necessarily so, although there are signs that indicate quality would help.
The average protein for the 2017 Oklahoma crop was about 11 percent. The last Kansas City hard red winter wheat protein premium report published in Milling and Baking News indicated that 11 percent protein wheat had a zero basis. Hard red winter wheat with 11.6 protein had a $1.20 basis.
If this protein premium holds into the 2018 harvest (I believe most of the premium will remain), and Oklahoma and Texas 2018 wheat averages 11.6 percent, the price could be $5.20 ($4 + $1.20) rather than $4.
Now, the odds of these basis not changing are slim. The point is that wheat with 60 pound test weight and 11.6 percent protein has significantly higher odds of generating a price above the cost of production than 60 pound test weight wheat at 11 percent protein.
Rather than producing 29 bushels per acre (state average), some growers average 45 bushels. Their production costs might be higher (let’s say $215/acre rather than $190). At 45 bushels per acre and $215 total costs, the break-even price is $4.78, compared to $6.55 for $190 and 29 bushels.
The difference between 29 bushels per acre and 45 bushels could be land quality, environmental conditions, and/or management practices. Yields could be increased by crop rotation, timing of fertilizer applications, and/or weed, disease, and insect control. Timely scouting tends to pay dividends.
Reducing production costs can be difficult, and sometimes means spending more money. Costs that count are per bushel costs, not per acre costs. Certain investments have proven to reduce costs in the end. An example is seed quality. Buying “bin run” seed for $4 or $5 could result in less net income than spending $12 for clean high quality seed.
Another example is fertilizer or fungicide applications. Assume that 30 pounds of nitrogen is top-dressed in February for $14 per acre. Assuming $4 wheat and that yield would be increased by 6 bushels per acre, costs will be reduced by $10 per acre (6 bu x $4 = $24; $24 - $14 = $10 profit for the fertilizer application).
The fertilizer application could also increase test weight and protein which could result in a higher price or reduce discounts. Each individual producer might not get a premium, but if the area producers fertilize for test weight and protein, the odds are that the local basis will increase, which will increase the local price.
A timely fungicide application that costs $10 per acre could increase yields 10 percent or more. Even at 29 bushels and $4, the fungicide more than pays for itself.
We have no guarantees for profit. We do have guarantees for losses if a quality product is not produced. Profit may also be increased, or costs reduced, by increasing yields.
Besides, “If it’s worth doing, it’s worth doing right.”