Wheat Production Costs Can Vary Considerably

Yield the major factor to financial bottom-line

Production costs vary widely by farm.  Case in point: A USDA survey of producers indicated that the average cost of producing a bushel of wheat was $3.97 in 1998, and ranged from about $1.25 to more than $6 per bushel.

The operating costs of producing U.S. wheat in 1998 averaged $60 per planted acre; the operating plus ownership costs averaged $107 per acre; and the total costs averaged $166 per acre.

Wheat production costs in the survey then—as they do now— vary widely across the country because of regional differences in cropping practices, yields, and costs of land, labor, and capital.

The cost of producing wheat generally declined as farm size increased. Regional differences in production practices and growing conditions were major influences on production costs and yields among wheat producers.  Most high-cost farms and very large farms were in the southeast region of the U.S.; these farms tended to be more diversified than farms in other regions, so wheat contributed a smaller share to their total farm income.

In the 1998 survey, with responses representing 194,846 farms producing 87% of total U.S. wheat acreage, costs of producing wheat varied by region due to differences in production practices, input use, and irrigation. Operating costs ranged from $50 per acre in southern Plains states to $115 for irrigated wheat production, primarily in the Pacific Northwest, California, and Arizona. Fertilizer, chemicals, and fuel accounted for 50-60 percent of the operating costs across all regions. Input costs varied widely among regions, reflecting differences in acreage covered and application rates.

Low-cost farms that had per-bushel operating and ownership costs of $1.86 or less accounted for a third of total U.S. wheat production in 1998. At the other end, high-cost farms that had operating and ownership costs of $3.62 or more per bushel accounted for 12% of U.S. wheat production. Differences between low and high-cost farms in 1998 were primarily attributable to yield differences, location, and enterprise size. Low yields combined with heavier input use raised per-bushel costs on high-cost farms considerably.

A larger percentage of high-cost farms specialized in other crops and livestock, compared with low-cost farms. Also, more high than low-cost producers had a major occupation other than farming and had a higher proportion of older operators.

Weather played a major role in the difference between low and high cost farms. Actual yields for high-cost producers were 14 bushels below expected levels, while low-cost producers surpassed their expected yield in 1998 by an average of 12 bushels per acre.

The complete survey, “Characteristics and Production Costs of U.S. Wheat Farms,” can be found online at www.ers.usda.gov/publications/sb974-5/sb974-5.pdf

Table 1—Cost of production forecasts for
U.S. major field crops, 2002-03¹

	2002	2003	2002	2003	2002	2003
Operating costs:
Seed	34.39	36.84	24.02	25.73	6.74	7.22
Fertilizer	48.44	51.26	9.13	9.67	22.93	24.27
Chemicals	26.74	26.93	23.15	23.32	7.28	7.33
Custom operations	10.79	10.95	6.04	6.14	6.28	6.38
Fuel, lube, and electricity	19.55	21.76	8.21	9.14	8.60	9.58
Repairs	14.33	14.09	11.00	10.81	10.67	10.48
Other variable expenses2	0.22	0.22	0.06	0.06	0.61	0.62
Interest on operating capital	1.17	0.99	0.62	0.52	0.48	0.41
Total, operating costs	155.63	163.04	82.23	85.39	63.59	66.29
Allocated overhead:
Hired labor	2.97	2.99	2.08	2.09	2.49	2.51
Unpaid labor	25.40	25.53	20.53	20.63	16.28	16.37
Capital recovery	57.06	56.05	58.24	57.18	51.59	50.67
Land	87.10	87.08	82.55	82.53	38.98	39.57
Taxes and insurance	5.58	5.69	7.26	7.40	3.97	4.05
General farm overhead	11.74	11.88	15.26	15.45	7.14	7.23
Total, allocated costs	189.85	189.22	185.92	185.28	120.45	120.40
Total costs listed	345.48	352.26	268.15	270.67	184.04	186.69
1. Forecasts as of May, 2003. Costs are projected primarily by applying changes for 2002 and 2003 in indexes of prices paid for farm inputs to the 2001 production costs.    2. Cost of depreciation and interest for farm machines.

When to Be More Trigger Happy with Grain Sales—
and When Not

• We’re are at a seasonally strong time for prices
• Prices are above total expenses, with average to better yields
• Futures prices are inverted: sell cash grain
• There is a full carry in the futures market: sell for delivery in a distant month
• Prices are high now but expected to trend lower
• You are paying for commercial storage
• Basis and futures are weakening
• The commodity funds are long (they bought) and likely to liquidate
• Prices cover direct costs, but not overhead expenses
• Sell at every 10% rally in prices—a middle-of-the-road approach
• The futures market is flat- no carry, no inversion
• Prices are low now but expected to trend higher
• It’s harvest and prices are at seasonal lows
• Discounts are severe
• You’re having production problems and have already sold more than 50%

Source: Betsy Jensen, Ag Commodity Instructor, Northland Community and Technical College