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Strong wheat prices expected to outweigh rising input costs this year

Agriculture.com Staff 04/14/2008 @ 7:15am

For the first time in many years, things are working for wheat producers -- the cost of production is being covered by the expected price with some left over.

Depending on yields and how conditions hold up for the next month or so, Extension economist Stan Bevers said the breakeven on wheat to cover all costs this year is expected to be around $4.50 a bushel.

"We're going to be able to do that this year," he said. "Even if the price fell some more, we're talking about making some decent money on the wheat crop." Bevers said the problem will be with next year's crop.

"This has been the most expensive wheat crop we have ever produced -- until next year," he said. With higher input prices due to fuel and fertilizer expected this fall, the breakeven for next year will be anywhere from $5.80 a bushel to $7 a bushel, Bevers said. But the strong prices producers are seeing this year are not expected to hold up.

"I'm squeamish about going out there and hedging this far out, but we need to be thinking about what we need to be doing for next year," he said. Bevers said this year a "perfect storm" created the $10-a-bushel wheat situation, including: a reduction in national wheat acreage, two back-to-back droughts in major exporting countries, U.S. and world wheat stocks at extreme lows, a reduction in the value of the dollar, other crops competing for acreage; and index funds pushing commodity prices artificially higher.

"The fact that we have a dollar that is so reduced in value right now benefits agriculture, but from an input cost, the coin is flipped," he said. "Fuel and fertilizer costs from competitors and other countries is more expensive to us." Even with $10-a-bushel wheat, other countries are wanting more U.S. wheat because of the weak dollar, Bevers said, which continues to bring domestic supplies down.

"While wheat production is expected to be up about 4 percent -- we expect to harvest about 58 million acres of wheat this year -- exports are also up because of the value of the dollar," he said. "They can buy a lot more wheat cheaper."

Bevers said right now, it is anticipated the U.S. will have 242 million bushels of wheat in reserve prior to harvest -- the lowest amount since WWII. Also, domestically, there is still massive competition for wheat acres, he said. Some acreage will go to corn, soybeans and potentially cotton.

The rest of the world will be planting more wheat later this year because they don't want to pay $10 a bushel for the U.S. crop, Bevers said. Computing the 58 million acres of harvest expected with a 40-bushel-per-acre projected average, he said a little stronger dollar also could result in a reduction of exports.

"That could be the difference between $10 wheat and about $6 next year," Bevers said.

As for the rest of this year, Bevers said he would repeat what he said last year: "Sell it across the scales and don't look back."

While the price moved higher following harvest last year, he said several things are different this year.

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