Today we return to winter wheat decision making. Whether you’re a rancher looking for forage or a landowner looking for a partner to graze, its important to consider the leasing structure. What will you pay/accept? Is it on gain or per head? Today we review some more profitability outcomes for different leasing rates on winter wheat.
Dates and Deadlines
9/20/2021 & 9/27/2021 – Five-State Beef Conference; Clayton, NM & Perryton, TX
9/24/2021 – Cattle on Feed
9/27/2021 – Hemp Mini Field Day; Lubbock
9/29/2021 – AgriLife Quickbooks Training; Vernon
What We’re Reading
Corn market déjà vu? – Farm Futures
Drought and Herd Liquidation – BEEF
Billions in USDA pandemic assistance continues – Feedstuffs Daily
USDA extends deadline to apply for pandemic assistance to livestock producers with animal losses – Morning Ag Clips
In the Southern Rolling Plains, wheat production has two main sources of income, grain and forage grazing. Every year, wheat farmers have the option to choose between grazing or not grazing their wheat, and also, define which grazing strategy will fit economically better in their operations.
In this issue we are going to analyze four different alternatives from the wheat farmer point of view. Our objective is to analyze each grazing alternative considering that you lease out the wheat pasture, or you allocate those costs to your own stocker business operation.
An estimated of the value of the cost of gain will be calculated for each grazing system so it can be compared to the most profitable option with today’s wheat prices and production costs. Return on Investment (ROI) on each alternative is going to be compared to help farmers make the best decision given their costs, prices, and production expectations.
The following scenarios considered most common wheat grazing systems in the area were analyzed and compared to wheat grain only production system:
Scenario 1 (Wheat Grain Only): In this base case scenario wheat forage production will not be grazed. Wheat is going to be produced to be only harvested. An average estimated wheat yield of 35 bu/acre was expected (Table 1).
Scenario 2 (Wheat Dual Stocker ~700 Lb.): This scenario contemplated a dual-purpose wheat production, pulling all cattle before March 1st and harvesting 100% of the planted area. A drag in yield of 5 bu/acre was considering due to the grazing effect. A total of 84 pounds of gain were estimated (Table 1).
Scenario 3 (Wheat Dual Stocker ~800 Lb.): This scenario represents a dual-purpose wheat production system that keeps those stockers from the early grazing phase through May 1st. In order to graze those stockers during the late grazing phase, approximately 33% of the planted area is going to be required for late grazing and is not going to be harvested. Estimated yield for the harvested area resulted in 30 bu/acre with a total estimated production of 156 pounds per acre (Table 1).
Scenario 4 (Grazed Out): Grazed out all wheat with no income from grain. This scenario assumes bringing more cattle during the second grazing phase to efficiently use all the forage resources and increasing the total pounds gained per acre. A total production of 275 pounds per acre were estimated (Table 1).
Table 1. Scenario Assumptions
Given this year’s high wheat prices and higher costs, Wheat Grain Only production showed a higher net income when compared with dual-purpose wheat systems with a yield drag of 5 bu./acre, or total grazed out wheat.
The sensitive table below (Table 2) showed the pound of gain value required for the Scenario 2 (Dual Purpose Wheat Stocker ~700) to have a similar net income as the Wheat Grain Only Scenario. Considering a 5 bu/acre reduction in yield, farmers should charge 73 cents for pound to compensate for the loss in wheat grain income (assuming a farm wheat price of $6.8 /bu). However, if now yield drag is considered, this scenario is more profitable than wheat grain only.
Table 2. Dual Purpose Wheat Stocker ~700 Lb. Scenario Analysis.
Results for Scenario 3 (Wheat Dual Stocker ~800 Lb.) show the impact that wheat prices have this year. It was assumed that stockers were retained until May 1st, thus reducing the area that was going to be harvested. A pound of gain price of 80 cents was calculated to compensate for the reduction of income from grain. Even with no yield drag, the value of the pound of gain should be of 67 cents to cover for less harvested grain. The higher the prices of grain, the higher should be the cost of gain price in order to compensate the reduction of area to be harvested.
Table 3. Dual Purpose Wheat Stocker ~800 Lb. Scenario Analysis.
The estimated value of the pound of gained for Grazed Out Wheat Scenario is much higher in order to keep the same net income as wheat grain only. Table 4 shows the price of pound of gain required to have similar net income values at each wheat grain only yield level and price. A price of 83 cents per pound of gain is required to have a similar net income of a Wheat Grain Only scenario that yields 35 bu/acre with a farm price of $6.8/bu. Lower yields and prices for Scenario 1 will led to lower values for pound of gain.
Table 4. Grazed Out Wheat Scenario Analysis.
Calculating the value of the pound of gain to match the highest profitable option is not actually telling how profitable each decision is. For that, Return on Investments (ROI) were calculated for each scenario at each level of pound of gain value, depending on the estimated production and prices.
ROI for Wheat Grain Only with a yield of 35 bu./acre and a farm price of $6.8/acre was calculated in 23%. Wheat Dual Stocker ~700 Lb will required an approximately 80 cents per pound of gain price for similar ROI considering a yield drag of 5bu/acre. Similarly, Wheat Dual Stocker ~800 Lb. and Wheat Grazed Out will required a pound of gain price of 81 cents and 84 cents for similar ROI.
Table 5. Return on Investment for each scenario.
Giving this year high expected wheat and input prices, any option that reduces the amount of grain to be harvested will decrease the ROI. A higher value for the pound of gain should be considered to compensate for the grain loss of income.
Grazing prices are built like any other price, due to demand and supply. However, it is extremely important to analyze these alternatives and calculate the pound of gain value on your operation to help you make the most profitable decision.
Please don’t hesitate to reach us if you have any questions using this decisions aid to help you analyzed and compared your alternatives.