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What to Do With the Wheat Crop?

Posted Feb. 1, 2006

Most producers in the Noble Research Institute's service area have not received enough moisture to have wheat pasture. An assumption was made at the writing of this article that we would receive sufficient moisture between now and February to allow a wheat crop to develop this spring. If this is not the case, this article will not have an impact on many producers.

Several options are available to a producer with a wheat crop start thinking about the economics of graze-out versus harvest for grain. If harvest is not an option, a producer can buy stocker cattle to graze, take cattle in on the gain, swath the wheat for hay or possibly use a combination of these options.

Wheat grown for grain is typically planted later in the fall than wheat grown for grazing. Wheat planned for harvest as grain needs to produce enough bushels, given the market price, to not only cover the total cost of harvest but also have a similar or higher return per acre than graze-out. An expected price of $3.75/bushel, a yield of 40 bu/acre and a harvest cost of $30/ac will return $120/ac to the cost of growing the wheat.

A producer who purchases stocker cattle to graze the wheat has the possibility to earn a greater, as well as a lesser, return than a producer who rents the pasture to someone else on a gain basis. The greater risk should yield a greater expected return, the key word being "expected." The important thing to remember is where we are in the cattle cycle. Cattle prices tend to climb, peak and fall over an average of 10 years. Many economists who study the cattle cycle suggest we have hit the top of the price cycle. As we head down, expect prices to be very volatile.

Those who plan on purchasing their own stockers need to take a good look at the value of the cattle and calculate the break-even price. The break-even analysis will help a producer see if the market is allowing for the margins they hope to receive. It is always important to keep a close eye on the value of the gain in the market versus your cost of gain. The value of the gain is the cents per pound you receive for putting on additional weight. If a 575-pound steer is worth $123/hundredweight and a 625-pound steer is worth $119/cwt, then the value of gain from 575 to 625 is worth 73 cents per pound for the additional 50 pounds. (((625*1.19)-(575*1.23))/50).

Table 1 shows an example of purchasing 500-pound steers for graze-out. Hedging your position with the appropriate number of futures contracts is a valuable price-risk management tool. However, not everyone is comfortable with purchasing and selling futures contracts or the financial requirements with making margin calls. The purchase of put options can be an effective form of insurance to protect the break-even, and you don't have to worry about margin calls.

A less-risky approach is renting the pasture out on a cents-per-pound-of-gain basis. With this situation, you avoid the price risk and possible death loss associated with the purchase and holding of stocker cattle for a period of time. You could rent the wheat, from March 1 to May 15 (75 days), to someone with 500-pound stockers at a stocking rate of 1.66 head/ac. Assuming they gain an average of 2.33 pounds a day, they would gain 175 pounds. At 35 cents per pound of gain, you could receive $101.68/acre.

Those who plan on swathing the wheat for hay need to consider the economics of graze-out versus wheat hay. Are you better off simply letting stockers consume all the wheat, or is there more value in the bales less the cost per acre? Assuming 40 bushels of wheat is equivalent to 3,000 pounds of forage, you could get three bales. At a price of $60/ton and a total cost of $17/bale (swathing, baling and hauling), a farmer would net $39/ac. However, there is also the risk of getting the wheat baled and having it rained on.

Good production and financial records from year to year give valuable facts about your operation and will help you make informed decisions. Financial records are the best management tool to use when trying to evaluate which option will return you the most "bang for your buck."