Wheat prices below breakeven point
The good news for wheat farmers is that 2016 is a bumper crop with winter wheat harvesters reporting 60, 70, even 80 bushels an acre yields.
The bad news is that wheat growers across the country and around the world are reporting similar record harvests. Estimated amounts are equal to a four-year total of all the wheat harvested in the United States, dropping the demand — and price — of wheat to below the breakeven point for farmers, agricultural experts say.
Russia, Ukraine, Canada, Australia, Argentina and Serbia — nearly all the major wheat-growing regions on the planet — are reporting surplus production. According to the USDA-National Agricultural Statistics Service, global wheat production is expected to exceed 738 million tons this year, a mountain of newly harvested wheat to be added to the Himalayas of ending stocks already on hand.
The U.S. Department of Agriculture reports that global stocks of wheat will exceed international demand by more than a quarter of a billion tons this year.
“From a financial perspective, the cost of production has not gone down nearly as much as the price of grain,” said Adrian Doucette, president of Stockman Bank for northcentral Montana.
Stockman Bank is Montana’s single largest private agricultural lending institution.
“An example we had the other day was someone who cut a phenomenal yield, but their inputs were $240 an acre,” Doucette said. “So when you work that backward to $4 wheat, you’ve got to have a pretty good yield to make a profit.”
That means that if the farmer was lucky enough to get $4 a bushel, his crop needs to average 60 bushels an acre just to break even. The 30-year average is 36 bushels an acre as reported by Montana State University extension offices.
Figures from the Chicago Board of Trade show that between January 2011 and March 2014, U.S. wheat prices fluctuated between $5.77 and $8.67 a bushel. But for the past two years, the price has consistently remained below $5 a bushel and has now slipped below $4. On July 14, NASS predicted the open market price for wheat will continue to fall, projecting a season-ending average price of around $3.70 a bushel.
At those prices, only exceptional harvests have any hope of showing a profit.
“That is a concern,” Doucette said. “We’re seeing a lot of deals where, given normal yields, the breakeven price is higher than the current market price. That tells me people are going to have to use up some of their equity; either in real estate or other assets if they continue raising a crop that’s not profitable. We never like to see anyone go backward, but it is going to happen if breakevens are above the market price. For the ones who don’t have the equity to fall back on, it’s going to be a difficult fall.”
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Perhaps more concerning are recent Department of Agriculture statistics showing the ratio of farm debt to farm income is now at its highest level since the 1980s — a time when one in three U.S. farmers were unable to pay their bills and farm bankruptcies exceeded $214 billion in a single year.
“Net farm income … tumbled in 2015 to a 13-year low of $55.9 billion, down 55 percent from a record $123.3 billion in 2013,” states a January report from Bloomberg news. “Debt is 6.6 times larger than net income, up from 3.8 percent a year earlier, and the ratio is the highest since 1984 when farm foreclosures were the highest since the Great Depression.”
“It’s not pretty out there,” said Lola Raska, executive vice president of the Montana Grain Growers Association. “All the organizations are getting calls from our growers asking, ‘What am I going to do?’ And the banks are running out of money and are concerned about repayments, so they’re not able to get the financing that they need. It’s getting kind of scary out there.”
The fiscal situation for Montana farmers is made even worse by a strong U.S. dollar and lower-than-average protein levels.
One U.S. dollar is currently worth about 102 Japanese yen. Five years ago, that same dollar would exchange for little more than 80 yen; a 25 percent increase in value. While high exchange rates are good for companies wanting to buy foreign imports, they make the export of U.S. commodities, like wheat, far less attractive.
“The U.S. dollar is very strong right now, and that really hurts us because foreign buyers can get (wheat) so much cheaper in other regions, particularly if they’re closer.” said Steve Becker, communications coordinator for the Montana Wheat and Barley Committee. “Approximately 80 percent of the wheat we grow in Montana goes overseas because of the exacting quality that they demand. But when you see the current strength of the dollar and this glut of wheat everywhere, the price makes it harder and harder for us to get our share.”
Over the years Montana has gained a reputation for its high quality wheat. Protein levels from wheat grown in the Golden Triangle and across the state often average 12 to 15 percent. This quality is eagerly sought out both domestically and internationally by food production companies willing to pay top dollar for a high quality product.
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But protein levels for the 2016 harvest are far lower than average. Winter wheat crops are testing in at only the 7 to 10 percent range. This is a medium-quality product common to the bulk of wheat being harvested across the United States and throughout the world — one that can be easily replaced from sources far closer to home.
“Texas, Kansas, Oklahoma, South Dakota, Minnesota — all the main wheat states in that area produced the same yield: 70, 80, 90 bushels on dry land with 7 percent protein,” said Alan Merrill, president of the Montana Farmers Union. “The low protein wheat is around everywhere in the United States, and you can’t sell it. A lot of the elevators are not offering anything at all for low-protein wheat.”
That leaves producers hoping to sell on the open market with a couple of different options, neither of which are particularly attractive.
Low-protein wheat prices have dropped so low that Midwestern feedlots are now turning to wheat as a cost-effective alternative to feeding corn. Feed wheat is selling for less than $2 bushel — a price guaranteed for a loss.
Or farmers can hold onto their wheat, hoping that if they store it for several months, a year or longer, the market will rise and they can recoup their investment.
It’s a risk. There are no guarantees that the global glut of wheat is going to reverse itself anytime soon, and not every farmer has that option.
“There are a lot of growers who can’t afford to keep their crop for more than a year,” Raska said. “You’re looking at equipment, seed and storage costs if you don’t want to sell now. If they’ve got land payments and rent or crop share, they need to have that cash flow. If you hang on to your grain hoping for a better price, then you’ve got lots of interest. There’s a lot of costs that just don’t stop.”
The greatest financial burden likely will fall upon young farmers who bought into an operation when grain prices were high, and for those producers who have recently invested in new equipment or additional property.
“We were so pleased because younger people seemed to be coming back into farming,” Becker said of a demographic trend that seemed to be building momentum over the past decade. “With that comes the debt from land, from equipment and everything else that goes into it. To see these low of prices is going to be particularly hard on that crowd. For those who haven’t been through it before, or who are not quite so well set up, it’s going to be serious.”
With so many negative indicators, it’s natural to compare current conditions with the farm crisis of the early 1980s. However, many experienced producers who survived those times point out that despite the low prices, things in 2016 are significantly better than they were in 1984.
“At that time wheat was about the only thing you could raise in this part of northern Montana,” said Lyle Benjamin, a fifth-generation farmer whose family has operated a farm outside of Sunburst since 1913. “We just figured out where we could cut costs, and typically those input costs were fertilizer and to a lesser extent seed. We tightened our belts. We didn’t spend much outside of farming and we didn’t take a very big living off of the farm.”
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Interest rates in the early 1980s were close to 18 percent, inflation was knocking at 12 percent and Montana was experiencing a prolonged drought. Today interest rates are below 4 percent. Inflation is barely above 1 percent, and though some parts of the state have been dry, it’s this year’s heavy spring rains that set the stage for the record harvests.
“We’ve been through this before,” said Charlie Bumgarner, a diversified wheat, peas, lentil, hay farmer and past president of the Montana Grain Growers Association. “It’s a cyclical market and that’s just the way it is. In the good times you get machinery-ed up and ready to go, and in the lean times — hopefully you don’t have those payments and you still have decent equipment to run with.”
“Now the guys who haven’t been through it are in a different boat,” he added. “In the last six or seven years, a lot of young farmers came back and they invested and they got into it and were making good money. Now we’re in these times. We’re a 100-year-old farm and we’ve got a base, so we can hunker down and we have reserves to take care of these lean years. Those guys who have no reserves and they’re kind of stretched out, it can be a tough deal, and I feel sorry for them.”