What is in this article?:
- Can you expect wheat prices to rise?
- No support from corn
Folks who pay attention to the wheat market could find several reasons why prices could be a bit higher than they are now.
WHEAT PRICES have suffered downward pressure as world supply increased and corn prices dropped, removing a key support factor.
No support from corn
Corn is also no longer supporting the wheat market as has been the case for the last 18 months. Bevers said when corn hits something like $7 a bushel, the cattle industry looks for alternatives and that’s been wheat. U.S. corn production last year topped almost 14 billion bushels, up from a typical 10 billion- to 12 billion- bushel harvest. “We need all of it,” Bevers said. Ethanol, along with the livestock feed demand and a small amount for export, burns through a lot of corn. “We need from 13 billion to 14 billion bushels.”
He said when production fell to 10 billion bushels in 2012 the livestock industry needed an alternative. Wheat filled some of the shortage and price went up. Typical ending stocks for corn—ten year average—is 1.5 billion bushels. “We’re slightly above that,” Bevers said.
He said wheat marketing options may be limited but an insurance price of $7.02 a bushel offers some protection. “We don’t really like to market to insurance but with the current situation, it’s a reasonable option.”
He said producers who are grazing cattle on wheat might want to consider leaving the cattle on as long as possible and capitalize on the potential daily weight gains and high cattle prices. “If you plan to harvest, you have to get cattle off by midnight, March 15,” he said.
Other marketing options include futures contracts. “But that comes with production risks.” He said put options establish a floor under wheat prices, “but you pay for leaving the option open. Now, the floor would be $5.25. A forward contract plus a call option is another possibility and producers could lock in $5.40, but with a production risk.”
Producers can also hold wheat and sell at harvest, he said.
At current prices, wheat producers should cover variable costs, which Bevers figures at $5.19 a bushel, considering a 26 bushel per acre yield. “You can get that now.”
Adding fixed costs to the equation adds another $53 to the total and moves breakeven to $7.23, which is not available and not expected to be. Kansas City price at time of Bevers’ presentation was $6.13 with a cash price of $5.50.
Corn farmers could have a tough time as well as cost of production has not declined to match lower corn prices. “When we see a big run up in crop prices, production cost rises to meet it. When prices come down, production costs also come down to meet it.” The problem is that cost declines lag two to three years behind price drops. “Production expenses are still high.”
He said a significant number of Midwest acres are moving out of corn and into soybeans. “And in the Southeast, there has been no drought so acreage is switching to cotton.”
Bevers said livestock producer who have cattle, “are in the driver’s seat. If you want to buy, it’s expensive.”
Beef production, Bevers said, will be substantially lower in 2014 and “even less in 2015. Boxed beef price (at time of the presentation) was $240. Ground beef was $5 to $6 a pound.” Consumers are paying more for ground beef than they are for gasoline.”
The question, he said, is can consumers substitute. They have little choice with gasoline, “except walking. But there is a top on beef prices because consumers have chicken, fish, pork and beans.”
Producers also have options, he said, and the smart ones will pay close attention to cost of production and the marketing alternatives available that will give them a chance to make a profit.