Laura McKenzie/Texas A&M AgriLife Marketing and Communications.
This week we update Dryland Wheat Budgets and compare them with some grazing scenarios. This will be another year of high production costs and weather uncertainty that will require optimizing our results and having a good marketing plan.
Dates & Deadlines
10/5/2022 – Mitchell County Farm Tour, Colorado City
10/5/2022 – TSCRA Educational Event, Victoria
10/6/2022 – TSCRA Educational Event, Mt. Pleasant
10/11/2022 – Northeast Panhandle Beef Conference, Lipscomb
10/13/2022 – Ag Support Programs and You, Electra
What We’re Reading
Peer Advisory Groups – Southern Ag Today
Texas A&M AgriLife to lead historic investment in Texas’ efforts to become ‘climate-smart’ – AgriLife Today
Ag groups welcome agreement to avoid rail strike – Beef
Is this a good time to buy farmland? – Southwest Farm Press
USDA forecasts U.S. corn, soybean, and cotton production down from 2021 – Morning Ag Clips
Wheat Budgets Updates
This week we update the wheat budgets for the rolling plains region and compare different production systems. Every year, we have to review our production costs and compare the various wheat alternatives.
Today we will review dryland wheat production budgets and compare different wheat grazing alternatives (Table 1). The general costs of wheat production increased by a small percentage from last year (2%). Production costs had increased significantly due to the high costs of fertilizers and chemicals in the previous season. So far this year, we have seen a slight decline in fertilizer prices. On the other hand, an increase in diesel and depreciation costs resulted in higher costs.
Table 1. Wheat Budgets Summary
In the Southern Rolling Plains, wheat production has two primary sources of income, grain and forage grazing. Wheat farmers can choose between grazing or not grazing their wheat and define which grazing strategy will fit economically better in their operations. We will analyze the following budgets: Wheat Dryland – No-Till, Wheat Dual Stockers 700 Lbs., Wheat Dual Stockers 800 Lbs., and Wheat Grazed Out (Table 1).
As always, we recommend you make your own budget considering your technology, equipment, custom hired, type of soil, and yields. Our area is large, and these factors vary greatly depending on where each of us is. Considering that we are at the beginning of the season, we assume average yields, which are pretty uncertain this year.
Dryland No-Till Wheat Grain Only
On this budget, we assume we plant wheat for harvest only with an average estimated wheat yield of 40 bu/acre (Table 1). We consider an increase in the costs of custom harvest, depreciation, and diesel, among others. Total variable costs, including custom harvest, are $246/acre. Indirect costs, the opportunity cost of land rent, interest on machinery and implements, and depreciation add up to $65/acre. The total economic production cost is $311/acre. Cash cost only can also be estimated and will mostly depend on whether you own the land and your equipment.
Considering a 40 bu/acre yield and a wheat price of $9.5/bu (according to CBOT values), the expected gross income is $380/acre. The expected net income is $70/acre. The breakeven prices for this yield are $6.1/acre to cover variable costs and $7.8/acre to cover total costs.
The breakeven yield at these expected wheat prices is 32 bu/acre to cover all costs (Table 2). Considering only the financial costs and assuming that one owns all the machinery, this indifference yield drops to 26 bu/acre. Although this would not cover the amortization costs that would have to be paid sooner or later.
Table 2: Price and Yield Sensitivity Analysis No-Till Wheat Grain Only
Wheat Dual Stocker ~700 Lb.
This alternative 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 considered due to the grazing effect. We estimate a grazing production of 84 pounds per acre (Table 1). The price per cost of gain was estimated a little higher at $0.65/Lb.
We have slightly higher production costs than grain-only wheat due to higher nitrogen fertilization (Table 1). Total production costs are $336/acre. The gross income from the sale of grain is $333/acre for a yield of 5 bu/acre less than the previous budget. Gross grazing income is budgeted at $51.68/acre. Total net income is $51/acre. Even considering a lower yield than the budget of Wheat Grain Only, the total income is almost similar.
Return on Investment (ROI) on each alternative was compared to help farmers make the best decision given their costs, prices, and production expectations. The sensitive table below (Table 3) shows the grazing price required for the Wheat Dual Stockers 700 Lb budget to have a similar net income as the Wheat Grain Only. Considering a 5 bu/acre reduction in yield, farmers should charge 96 cents per pound to compensate for the highest production costs. However, if no yield drag is considered, this scenario is more profitable than the previous one.
Table 3: Grazing Price and Yield Sensitivity Analysis Wheat dual Purpose 700 Lb
Wheat Dual Stocker ~800 Lb.
This wheat budget represents a dual-purpose wheat production system that keeps those stockers from the early grazing phase through May 1st. Approximately 33% of the planted area will be required for late grazing and will not be harvested. The estimated yield for the harvested area resulted in 35 bu/acre with a total production of 138 pounds per acre (Table 1).
Results for Wheat Dual Stocker ~800 Lb show wheat prices’ impact this year. Total income was estimated at $306/bu, while total net income resulted in an $11/acre loss. The revenue from grazing cannot compensate for the loss of harvested wheat and the high production cost.
A grazing price of $1.23/lb 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 above $1/lb to cover for less harvested grain. The higher the prices of grain, the higher should be the cost of gain price to compensate for the reduction of grain harvested.
Table 4: Grazing Price and Yield Sensitivity Analysis Wheat dual Purpose ~800 Lb
Wheat Grazed Out
On this budget, we assumed bringing more cattle during the second grazing phase to efficiently use all the forage resources and increase the total pounds gained per acre. We estimate a total production of 271 pounds per acre (Table 1). Considering a grazing price of $0.65/Lb, the estimated income was $176/acre. The net income for the enterprise resulted in a loss of $84/acre. Grazing breakeven prices to cover variable and total costs were $0.79/lb and $0.96/lb, respectively.
The estimated grazing price for Grazed Out Wheat Scenario must be much higher to keep the same net income as the wheat grain. A price of $1.22/Lb is required to have a similar net income to a Wheat Grain Only scenario that yields 40 bu/acre with a grain price of $9.5/bu.
Conclusions
This particular year shows high production costs and wheat prices. 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 grazed-out wheat.
ROI for Wheat Grain Only with a yield of 40 bu./acre and a farm price of $9.5/acre was calculated at 27%. Wheat Dual Stocker ~700 Lb will require to charge approximately $0.96/Lb to obtain a similar ROI (considering a yield drag of 5bu/acre). Similarly, Wheat Dual Stocker ~800 Lb. and Wheat Grazed Out will require $1.23/lb for a similar ROI.
This year, an option that reduces the amount of grain 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 crucial to analyze these alternatives and calculate the grazing price of your operation to help you make the most profitable decision.
Please don’t hesitate to contact us if you have questions using this decision aid tool on your operation: “Wheat and Small Grain Decision Aids” Excel spreadsheet (https://vernon.tamu.edu/extension-projects/d3-agricultural-economics/ ).