- Drought conditions hit wheat farmers’ pocketbooks.
- Growers should review their options.
- Price will determine actions.
Many wheat producers face the total loss of their 2011 wheat crop and others face major losses. Some wheat producers will lose about $150 per acre. The $150 does not include land or harvest costs. At 32 bushels per acre and $8 wheat, lost gross income would be $256 per acre.
Farming 1,000 acres of wheat would be a $150,000 loss of wealth – more if you take into consideration lost profit. The gross income loss would be $256,000 for 1,000 acres.
When working with these producers, a quote from Teddy Roosevelt comes to mind. “It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly; who errs and comes short again and again; because there is no effort without error and shortcoming; but who does actually strive to do the deed; who knows the great enthusiasm, the great devotion, who spends himself in a worthy cause, who at the best knows in the end the triumph of high achievement and who at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who know neither victory nor defeat.”
Most producers are relatively good managers. They know what their alternatives are. The unknown is the weather. Will it rain? The answer is “Yes.” The unknowns are “When will it rain?” and “How much will it rain?”
Another important question is: “How much risk can I take?” This answer will partially depend on the producer’s financial condition and whether crop insurance has been purchased.
For some, crop insurance will cover production costs and may make up some of the gross income loss. An option to generate more income is to plant a summer crop. This option’s risk is the production costs. And, since most wheat is already at the heading stage, crop insurance is probably not available to cover the risk.
Some wheat producers forward contracted wheat for June 2011 delivery. Sufficient wheat may not be produced to meet the contract requirements. Options include settling the contract with the elevator or buying wheat from neighbors to deliver the bushels contracted.
Most elevators will settle a forward contract by allowing the producer to pay the difference between the contract price and the posted cash price plus a management fee of 5 cents to 10 cents per bushel. Some elevators may settle for the difference between the hedged price (elevators sell KCBT July wheat contracts to cover the price risk) and the current KCBT July wheat contract price plus a management fee.
Most forward contract prices are less than the current price. Thus, elevators have made margin calls to cover losses from the futures contracts. This expense is covered with the fee.
The third problem is if wheat is being harvested, how it should be sold. The alternatives are to forward contract some wheat now, sell at harvest, sell in the fall, or stagger the sales over time.
The choice depends on price. When will the price peak: now, at harvest, or in the fall? As discussed, weather will determine when.
Below-average hard red winter wheat production will set the stage for higher prices. If, like last year, foreign wheat production is less than expected, the wheat price could reach $10, which would probably happen in the October/November time period.
Two rules for this are: one, any strategy will outperform no strategy; two, staggering sales over time is a successful strategy used by many producers.