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Wells Fargo Ag Economist: Markets Buoyed by Bullish, Bearish Factors If moisture conditions stay dry, the markets will have to start building in additional risk premium given the poor soil moisture conditions and low stocks. On the flip side, however, a significant improvement in the drought stress outlook would bring a major drop in the current future prices, especially given significant worldwide grain production competition, according to Michael Swanson, agricultural economist, Wells Fargo, Minneapolis, Minn. “For most producers, the greatest risk is not missing the top of the market, but being stuck at the low prices,” he says. Swanson was a speaker at South Dakota State University’s annual Commodity Price Outlook conference, held recently in Brookings. Additional risk comes from the current counter-cyclical payment situation. Swanson says the worst possible scenario for CCP is for the price to be exactly equal to the trigger price. This would mean no counter-cyclical payment and no opportunities to forward price at better levels. The current expectation is for a muted acreage response in the spring wheat regions, says Swanson, as many producers have introduced corn and soybeans into their rotations over the last five years and are not eager to go back to heavier wheat rotations. For the moment, the only reasonable forecast is for a recovery to trendline yield, with a negative risk factor from the current soil moisture outlook. “The key for most producers will be knowing when to say when. Producers need to know with a high degree of precision and certainty their cost of production,” says Swanson. “When the market has reached their cost of production and allowed some margin, they should lock in a reasonably significant portion of their forward sales.” Swanson outlines bullish and bearish conditions for wheat, corn, and soybeans: Wheat BULLISH
BEARISH
Soybeans BULLISH
BEARISH
Corn BULLISH
BEARISH
Do You Know Your Breakeven Price? George Flaskerud, North Dakota State University extension ag economist, says that breakeven price varies by region and by farm. However, it can generally be calculated by dividing total cost (farm and family living expenses) by average or expected yield to arrive at a per-bushel-yield price. Flaskerud offers an analysis for the northern Red River Valley as an example, arriving at a “survival price” and an “acceptable price” for wheat, corn, and soybeans. The survival price is an estimate of income needed to recover farm and family living cash expenses, excluding farm program payments. The acceptable price accounts for indirect costs as well, including interest paid on land and equipment, depreciation, and other overhead expenses. He bases total cash costs figured under the survival price, and total economic costs under the acceptable price, on assumptions used by NDSU to establish crop budget projections for 2003, which can be found online at www.ext.nodak.edu/extpubs/ecguides.htm . He uses a figure of $20/acre for family living based on an estimated average of $40,000 and average cropland from 2000. The $11 estimate for additional land cost accounts for owned and rented land, and assumes 70% of land is rented. The $11 government payment is the average direct payment for a typical farm in ND, estimated to vary between $9 - $15/acre, depending on that farm’s base acreage. See an update on grain marketing strategies to consider from Flaskerud at his crop marketing and risk management web site, www.ag.ndsu.nodak.edu/aginfo/cropmkt/cropmkt.htm . On the home page, click on the link “Update on Marketing Strategies for Old Crop and New.” Breakeven Price for Wheat, Northern Red River Valley, 2003 Survival price
Acceptable price
Breakeven Price for Corn, Northern Red River Valley, 2003 Survival price
Acceptable price
Breakeven Price for Soybeans, Northern Red River Valley, 2003 Survival price
Acceptable price
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