Farm management specialists have reported that the break-even price for 2010 wheat is about $4 per bushel. The basic assumption was for 32 bushel per acre wheat and no land charge. If production is in the 40 to 45 bushel level, the break-even price may be $3.50. If yield is around 25, the break-even price may be $4.50.
Depending on the basis offered for June 2010 delivered wheat, the market is offering about $4.50. This forward contract price was calculated using the Kansas City Board of Trade July wheat contract price and a minus $1 basis. Forward contract basis range from a minus 80 cents to a minus $1.20.
The good news is that $4.50 will cover most producers’ variable costs for producing wheat. The bad news is that the odds the June 2010 wheat price is $4.50 are next to zero. The actual price will either be above $4.50 or below $4.50. And at this writing, the odds are about equal.
In reality, buyers take a 10 to 15 cent risk premium with forward contracts. Buyers face the risk of non-delivery and, if prices increase, buyers have to deposit money in the margin account. This implies that the market may be predicting a June cash price of about $4.60.
Since June 2009, the KCBT July wheat contact price has traded from a high of $7.75 and a low of $5. Using a minus $1 basis, the market has offered between $6.75 and $4 for June 2010 delivered wheat.
In early June 2009 when the market was offering above $6 for 2010 wheat, the USDA was projecting 2009-2010 marketing year ending stocks of 647 million bushels for the U.S. and 6.7 billion bushels for the world.
In September and October when the market was offering $4 for 2010 wheat, the USDA was projecting 2009-2010 U.S. wheat ending stocks of 864 million bushels and world wheat ending stocks of 6.9 billion bushels. With 864 million bushels of wheat ending stocks, prices may have a difficult time going above current levels.
After the USDA released the October wheat ending stocks estimate, the KCBT July wheat contract price increased over $1. The price increase may have been due to wet field conditions that have delayed planting the 2010 wheat crop.
Market analysts have predicted that winter wheat planted acres for 2010 will be less than the 2009 wheat crop planted acres. Soft red winter wheat acres may be as much as 20 percent less and hard red winter wheat acres may be 3 percent to 5 percent less.
Since the KCBT July wheat contract price peak in late-October, the contract price has declined about 55 cents. There are indications that the contract price may return to near $5. This would indicate a harvest price of $4.
If 2010 total U.S. wheat production is above 2.1 billion bushels and world wheat production is above 23.5 billion bushels, June 2010 Oklahoma and Texas cash wheat prices could be as low as $3.75.
For wheat prices to be $5 or better, U.S. wheat production needs to be less than 2.0 billion bushels and world wheat production needs to be less than 22.5 billion bushels.
Between now and June 2010, the odds are that a lot will happen to change wheat price. Weather favorable to production will result in lower prices and weather unfavorable to production will result in higher prices.
Prudent producers should focus on keeping costs low while concentrating on producing a quality product. It is important that sufficient nitrogen be applied to insure a minimal level of wheat protein. There is already an excess supply of low protein wheat.