Today I’m beginning a series on the state of commodity markets for several Texas High Plains commodities. We’ll kick off the series today with winter wheat. Over the month of February I’ll also cover the markets for corn, sorghum, cotton, and cattle.
Dates and Deadlines
1/4/2021 – 2/12/2021 – CRP Enrollment
1/27/2021 – 3/3/2021 Each Wednesday – Master Marketer Amarillo Online Program
2/18/2021 – 2/19/2021 – USDA’s 97th Agricultural Outlook Forum
2/9/2021 – Perryton Summer Crops Conference
2/9/2021 – WASDE
What I’m Reading
Regulatory freeze stalls latest round of CFAP payments – Feedstuffs
Texas A&M, industry partners usher in new era for POSC Department – AgriLife Today
Investors Flock to SPACs, Where Risks Lurk and Track Records Are Poor – Wall Street Journal
Hard Red Wheat Jul ’21 (KEN21)
This morning (February 1st) July Kansas City Hard Red Wheat (Wheat) opened at $6.392/bu. That price represents an increase in value of 15% since November 2nd and 35% since August 3rd. We know that in general an increase in price is driven by either an increase in demand, a decrease in supply, or a combination of the two. That is, unless you’re a GameStop stock.
Which of these dynamics is at play? The January WASDE left supply values unchanged, though I believe that we are going to lose a lot of winter wheat to prolonged drought through harvest (see the crop progress report here). The bulk of the change in demand (25 million bu. worth) came from increasing feed and residual use. The worldwide dynamics of rising grain prices are putting wheat in the relatively competitive range for feed when compared to corn, beans, and sorghum. Of the estimated 25 million bushel increase in feed use, 15 million were from hard red wheat.
As a result of these dynamics, USDA raised the forecast season average farm price in the January WASDE from $4.70/bu. to $4.85/bu. However for the Texas A&M AgriLife Extension District 1 wheat budgets we’ve included a harvest-time price of $5.28/bu.
U.S. Wheat Supply and Use
U.S Wheat Supply and Use by Class: Hard Red Winter
Wheat Breakeven Prices
We often discuss the need to understand your own breakeven price to cover variable costs and total costs. The point at which average variable cost exceeds price is the shutdown point. When price rises above the shutdown point, it is within your financial interest to continue producing as you can dedicate some revenues towards fixed costs. The point at which average total cost exceeds price is the breakeven point. When price rises above the breakeven point, you have economic profits.
Since dry land wheat has struggled so much in our region this year, we’ll focus on irrigated wheat for our examples. You can find our Texas A&M AgriLife Extension wheat budgets, and all of our other budgets here. For sprinkler irrigated wheat, the breakeven price to cover variable costs is $4.16/bu. To cover total costs, the price of wheat sold must be $7.47/bu. Remember that these budgets are an approximation and apply ‘in general’ to a diverse area, from Swisher to Dallam county. It is important to tailor these figures to your own operation.
Pricing
These breakeven values provide a target to aim for when pricing wheat. Most analysts I follow are priced in the neighborhood of 50%. Clearly, the current price range of $6.25/bu. to $6.40/bu. is well above the breakeven price to cover variable cost. If you haven’t priced any of your crop using strict futures or an option, I think now is a time to lock in a portion. Many indicators, such as net longs from speculators and a few technical indicators indicate a near-term bullish outlook. I don’t expect big changes in the upcoming WASDE and the next influential report would be the Prospective Plantings report.
Today’s closing appears to be flirting with lower bound resistance (the 18-day moving average) and the next resistance I can find is the lower Bollinger channel, in the neighborhood of $5.95/bu. What does this mean? Given recent moves, we might be entering a period of range-bound activity. That means that prices may not break either direction unless some fundamental signal changes.
The goal is to price in a profitable range, hopefully even above the breakeven price to cover total costs, $7.47/bu. There are plenty of dynamics that make that possible though I’m not sure it is likely. The prices of corn, beans, and sorghum continue to see support from international trade, low stocks, and increased use. This makes wheat, especially winter wheat with good protein levels, an attractive feedstuff, and the more that is being fed, the better the price support. The gain or grain decision at the individual level is going to be more difficult than past years come March.
Keep an eye on your marketing plan and be particularly nimble around the Prospective Plantings report (March 31), which includes winter wheat seedings, a key indicator of winter wheat supply into the rest of the year.