Wheat prices were in the mid-teens earlier this year, but the bloom has certainly faded, and they are now less than half of that price. But as plans are made to plant winter wheat, what are your plans for profitability? Profits were quite available when wheat was at $15, but is $7 wheat a crop that will provide positive revenue or will be you be in the red?

Domestic and global wheat production had been challenged the past several years, and with increased demand for wheat flour, plus demand for acreage to plant corn and soybeans, wheat prices naturally worked higher. Economists Alan May, Jack Davis, and Matthew Diersen of South Dakota State University examine wheat production and profitability in their latest newsletter. They say consumption outpaced production in 2007, leading to a small carryover into 2008 that gave rise to the historic price climb. With increased acreage and yield produced in the US this year, production surpassed 2007 by 19%. USDA’s latest estimates are for the carryout to grow from a 30 year low to a healthy 574 million bushels. While that carryover is comparable to the surplus stocks in 2003 to 2005, prices were then in the $3 to $4 range, compared to current prices at $6.50+.

Price uncertainty, combined with market volatility, will face producers as they buy seed, fertilizer, crop protectants, and pay rising cash rent. The South Dakota economists say despite larger wheat supplies, those supplies will be tight enough to support prices above $6 for the balance of this year. Beyond that time frame, prices will be influenced by US planted acreage and global production expected in 2009. With the slowdown in world economic growth dampening demand and a higher dollar curtailing some exports, the economists believe we may be at a turning point for longer term price pressure in 2009. That means production costs need to be under control and a marketing plan should be implemented along with a revenue insurance package.

The South Dakota team is forecasting an $18 per acre drop in the return to labor and management compared to 2008. Total production costs are expected to rise from $217 in 2008 to $309 next year, with 70% of the increase due to fertilizer price. Consequently, they are recommending soil tests to determine fertilizer needs more accurately. Based on a 50 bu. yield and a $7.50 market price, gross revenue would be $375 per acre. With production costs estimated at $309, they project a return to labor and management of $65.85 per acre.

To protect that revenue, crop insurance is recommended and the sign-up deadline for many producers is the end of the month. The South Dakota economists report preferences for CRC and RA policies were about evenly split. However, price movement limitations by CRC policies may have caught some producers without adequate coverage on forward contracts last year. For 2009, there is a cap being placed on Revenue Assurance policies, so both RA and CRC will be capped at double the base price. That means there could still be hedging losses for producers even with the revenue insurance contracts.

The economists recommend addressing the issue with a “covered sale.” That begins with a cash contract or a hedge, then buying a well out of the money call option, just below the upper level of the potential revenue insurance indemnity coverage. That call option should be obtained at a minimal premium price, and would give the owner of the option additional price coverage should the market climb higher. The value of the option would increase and its sale would add revenue to the selling price for the wheat.

Summary:
Wheat prices have dropped more than 50% from the higher values seen for the 2008 crop, and with higher production costs, producers growing winter wheat will have some serious budget challenges to ensure profitability. Among the recommendations are soil tests to more accurately determine fertilizer needs and the use of revenue insurance and a synthetic put option to manage price risk.