Wheat Profits Could Narrow As Input Prices Increase

Wheat Profits Could Narrow As Input Prices Increase

August 8, 2008

The past year has brought some of the most profitable wheat production in recent years, but the outlook for next year is quite different. Growers preparing to plant the 2009 crop are facing higher input prices, some at record levels. Prices for fuel, fertilizer, seed, machinery, and labor are increasing at the same time wheat prices are leveling out, and in some cases even dropping. 

Rising Input Costs

The following tables reflect UNL crop budget values for both irrigated and dryland wheat over the past 10 years, with a projection for the 2009 crop. With nitrogen prices increasing to nearly $1,200 per ton and phosphate to more than $1,250 per ton, fertilizer prices will have a dramatic impact on wheat profitability in 2009. In addition, fuel prices are up over $1 per gallon since this time a year ago and seed prices are up from 2008 and expected to be $13 to $15 an acre.

For planning purposes, it is assumed that many producers have taken advantage of the recent profits to complete some overdue machinery updates, increasing the depreciation and other fixed machinery costs for the next year. In addition, the cost of hired labor, crop insurance, custom work, etc. have all increased in the past year by an average of nearly 20%. Finally, according to a recent USDA report, the price of land has increased by 19% in the past year.

Predicted Breakeven Point over $6.85 for Wheat

What does this mean to wheat producers? In the following tables, both irrigated and dryland projected 2009 budgets show a breakeven price for wheat in excess of $6.85 per bushel. As recently as 2004 the breakeven price for wheat was near $4 per bushel.

With costs reaching levels near the current price, it is critical that producers focus on both cost management and wheat marketing over the next year. Making key purchasing decisions in a timely manner and looking for opportunities to buy inputs at significant discounts will be critical to profits this year. Marketing the 2009 crop will be a challenge since some elevators haven't been willing to cash contract the next crop. Producers will need to be creative and careful in looking for opportunities to get a portion of the 2009 crop priced at profitable levels.

It is hard for me to imagine the possibility of $7.00 wheat and having to worry about profitability. However, that is exactly where we are today. Use care in making both purchasing and selling decisions over the next year.

Paul Burgener
Extension Research Analyst
Panhandle REC, Scottsbluff

Table 1. Cost of production and projected revenue for irrigated winter wheat from 1999.
 
UNL Budget Year

Cost Category

1999

2001

2004

2006

2008

2009 P

Fertilizer

22.90

42.40

43.36

80.16

146.40

156.00

Herbicide

0.00

4.14

4.16

4.26

3.30

4.00

Insecticide

0.00

1.26

1.32

0.61

0.87

0.87

Fungicide

0.00

10.20

11.24

11.24

8.92

10.07

Seed

18.00

14.40

24.00

19.20

15.60

26.00

Fuel & Lube

34.01

20.81

20.81

38.20

59.22

65.80

Repairs

10.29

10.40

9.45

9.97

7.97

7.97

Custom

5.25

11.80

9.60

13.75

21.31

25.57

Labor

11.61

8.07

8.07

6.27

6.27

7.52

Depreciation

26.89

25.48

24.81

28.59

28.60

34.32

Operating Interest

5.13

7.00

5.28

7.35

7.35

18.03

Overhead

5.36

6.00

6.00

6.00

6.00

7.00

Management

22.75

21.50

21.50

21.50

21.50

25.80

Machinery THII

19.50

9.70

8.62

9.43

9.43

11.32

Irrigation TII

2.99

0.72

12.04

14.87

14.87

17.84

Land Rent

75.41

100.00

95.00

110.00

132.00

140.00

Total Cost

$260.09

$293.88

$305.26

$381.40

$489.61

$558.11

 

Expected Yield (bu/ac)

80

80

80

80

80

80

Price

$2.20

$2.75

$3.23

$4.57

$7.50

$7.50

Total Revenue

$176.00

$220.00

$258.40

$365.60

$600.00

$600.00

 

Net Return

-$84.09

-$73.88

-$46.86

-$15.80

$110.39

$41.89

 
 
 
 
 
 

Breakeven Price

$3.25

$3.67

$3.82

$4.77

$6.12

$6.98

Source:  1999-2006 Nebraska Crop Budgets; 2008 Panhandle Update of Nebraska Crop Budgets; 2009 Projected Costs by Paul Burgener based on Nebraska Crop Budgets. Prices from USDA sources.

Table 2. Cost of production and projected revenue for dryland winter wheat from 1999.
 
UNL Budget Year

Cost Category

1999

2001

2004

2006

2008

2009 P

Fertilizer

9.40

22.40

23.36

24.96

58.76

76.00

Herbicide

0.00

4.14

4.16

4.26

3.05

4.00

Insecticide

0.00

1.26

1.32

0.61

2.00

2.00

Seed

9.00

7.20

12.00

9.60

8.00

13.00

Fuel & Lube

5.14

4.46

4.46

8.97

11.75

13.06

Repairs

6.74

6.19

6.63

8.98

8.41

8.41

Custom

1.75

4.10

3.20

4.75

7.68

9.22

Labor

6.93

6.60

6.60

6.60

5.49

6.59

Depreciation

20.47

13.84

14.21

17.79

17.71

21.25

Operating Interest

1.81

3.19

2.47

2.75

3.99

7.05

Overhead

2.04

3.00

3.00

3.00

3.00

3.50

Management

12.25

11.26

11.26

11.26

12.54

13.22

Machinery THII

15.30

11.90

12.12

15.83

16.24

19.49

Land Rent

48.75

60.00

60.00

60.00

72.00

78.00

Total Cost

$139.58

$159.54

$164.79

$179.36

$230.62

$274.79

             

Expected Yield (bu/ac)

40

40

40

40

40

40

Price

$2.20

$2.75

$3.23

$4.57

$7.50

$7.50

Total Revenue

$88.00

$110.00

$129.20

$182.80

$300.00

$300.00

             

Net Return

-$51.58

-$49.54

-$35.59

$3.44

$69.38

$25.21

             

Breakeven Price

$3.49

$3.99

$4.12

$4.48

$5.77

$6.87

Source: 1999-2006 Nebraska Crop Budgets; 2008 Panhandle Update of Nebraska Crop Budgets; 2009 Projected costs by Paul Burgener based on Nebraska Crop Budgets. Prices from USDA sources.