Wheat Prices Indicate Zero Profit Per Acre

Wheat may be forward contracted for harvest delivery for about 30 cents less than the KC July wheat contract price. The basis range is from a minus 50 cents (southern Oklahoma and Texas Panhandle) to a minus 15 cents (north central Oklahoma). Using a KC July wheat contract price of $5.65, the harvest forward contract price would be $5.35 ($5.65 – $0.30).

The variable cost of production for 32 bushels per acre wheat averages about $171 per acre or $5.35 per bushel. Current wheat crop conditions imply average yields, so price ($5.35) times yield (32 bushels) minus total costs ($171) equals zero. Zero indicates no profit from wheat.

If 2015 Oklahoma and Texas wheat yields are above expectations (average), the price of wheat would be expected to be less than $5.35. If wheat yields are below expectations, then the price of wheat would be expected to be above $5.35. Lower prices would be offset by higher yields or higher prices would be offset by lower yields.

The net return relation between wheat prices and production is not one to one. A 10 percent reduction in yield would not necessarily result in a 10 percent increase in prices or vice versa. The point is that unless something changes in the world’s wheat market, profit from wheat is not expected to be very good for the 2015 wheat crop.

If 2015 foreign wheat production (especially in the Ukraine, Russia, Argentina, and Australia) is significantly below average, then Oklahoma and Texas wheat prices would probably increase. The point is that Oklahoma and Texas wheat prices (profit from wheat production) are more dependent on wheat production in foreign countries than on production in Oklahoma and/or Texas.

Supporting evidence of this premise is that for the 2014/15 wheat marketing year, hard red winter (HRW) wheat ending stocks are projected to be 253 million bushels compared to a five-year average of 333 million bushels. The five marketing year (2009/10 – 2013/14) average U.S. HRW wheat price is $7.03. To date, the 2014/15 marketing year average price for HRW wheat has averaged about $6.

With HRW wheat ending stocks projected to be 24 percent below average, the average HRW wheat price would be expected to be above average. It is not! The price is 14 percent below average, and it is below average because foreign wheat stocks are above average.

Research shows that Oklahoma/Texas wheat prices could go as low as $4. This decrease is not very likely unless 2015/16 U.S. and world wheat production is well above average. Even in this case, prices would not bottom out until September-October.

The good news is that the KC wheat futures contracts show carry (differed contracts have a higher price than the current contract). At this writing, the KC March contract is $5.62, the July is $5.68, and the December is $5.93. Normally, the July wheat contract price will be lower than the March and/or May contract prices.

Another factor adversely impacting wheat prices is the value of the U.S. dollar against other currencies. Since July 2014 the dollar index has increased from about 80 to above 95. The higher dollar value has increased the cost of U.S. wheat about $1.30. If the dollar value declines, wheat prices should increase.

Low prices and low profits are hard to take. But remember, “The cure for high price is high prices.” We have experienced that recently.  “The cure for low prices is low prices.” We are experiencing that now and profit expectations from selling wheat are near zero.

Source: Kim Anderson, Southwest Farm Press

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