Grazing wheat likely offers profits this winter

Cattle Market & Farm Reports, Editorials
Aug 29, 2008
by WLJ

Grazing wheat likely offers profits this winter
With grain and harvested forage prices likely to stay quite high throughout the next few months, producers looking for profitable opportunities should take a good look at grazing winter wheat, say experts. Though the costs of grazing cattle are higher than in recent years due to elevated wheat prices, feeder cattle prices have kept in step and may still offer attractive profit margins to good managers.

Derrell Peel, ag marketing specialist with Oklahoma State University, said that uncertainty abounds in both the wheat and cattle markets. This makes it difficult to predict how good the wheat grazing prospects look, but for those with sharp pencils, good opportunities will surely appear.

"The situation’s pretty volatile right now with all there is going on in the futures markets," he said. "In general, it’s more expensive to do everything now, but that shouldn’t keep producers from looking for opportunities. Even though it costs more to grow the wheat for farmers, the forage is worth more as well."

Nervous bankers, along with wheat farmers who might not want to take chances with their valuable wheat crops, could put a dent in the number of acres available for grazing, Peel said.

"A lot of wheat farmers, and particularly their lenders, are suffering from sticker shock when they look at the input costs as planting rolls around," he said. "But, by the same token, the value of grazing is high and there are some real opportunities. The budgets that we’ve run show that it looks good for both the farmer and the cattleman to graze the wheat."

Ranchers must pay attention to the futures markets to reduce the risk of buying feeders just for winter grazing, and farmers must decide whether revenue from grazing is worth risking lower yields.

"There’s definitely a way to pencil in some profits, because the margins are there, but the question becomes whether either party is willing to take the risk," Peel explained. "Is the farmer willing to put up with the additional fertilizer costs and decreased yields, and is the cattle producer willing to go out and buy expensive feeder cattle to graze the wheat with?"

Just as all input costs have risen over recent years, so has the cost of grazing wheat, but not without an equal rise in cattle prices—and potential profits.

"We used to look at the cost of grazing wheat on a per-pound of gain basis in the area of 30-35 cents," he notes. "Now we’re at least up around 40-45 cents per pound of gain just to pay the production costs. On the other hand, the value of that gain is potentially up around 80-85 cents. Those figures are based on March feeder futures that were up around $115. Since we figured those numbers out, the futures have dropped, but it shows that there are definitely opportunities to lock in some profits if you jump on the futures at the right point."

Peel said not using the futures market to reduce the risk of purchasing feeding cattle is unlikely to lead to disaster, but that playing the markets to your advantage is helpful when deciding whether the venture is worth it.

"The lesson is it’s one thing to notice futures being elevated to a certain price point, but it’s quite another to act on it. You have to look for opportunities in the market and take them when you can," said Peel. "If you just go out and buy feeders to put out on wheat and don’t hedge them, it’s unlikely that prices will drop significantly by the time you market the cattle. If you can live with that much risk, maybe you don’t need to hedge, but it’s better to just lock something in when you get the chance."

The increased costs of grazing wheat are not limited to the cattle producer, notes Peel, who says farmers face additional risk along with discouraging lenders.

"Wheat farmers, once they figure in the cost of fertilizer, loss of yield and other factors, are looking at spending about an extra $80 per acre to graze the wheat, but that doesn’t mean they can’t recoup that much and more," he explained. "It costs more money to play the game nowadays, and neither the farmers or the ranchers should ignore an opportunity just because it seems too expensive."

Peel said that because of the way the feeder cattle market is rewarding heavier cattle with equal or better price-per-cwt. numbers than lightweight calves, there may not be a large demand for wheat grazing this winter.

"We’re also not sure how many calves we will even have out on wheat this year because when you look at the incentives to retain ownership, we really may not see a very big calf run," noted Peel. "In many cases it’s paying for producers to just background the calves and put a couple extra hundred pounds on them rather than to sell them after weaning."

Higher input costs may make wheat grazing seem riskier than ever, says Peel, but the tools to manage those risks are still around for good managers to use.

"There is opportunity in the wheat pasture situation. The costs may scare some people, but the input costs and your gross revenues are unimportant. The margin is what’s important, and that’s what you need to look for to take advantage of today’s market," he said. "Business as usual is something different than what it used to be." — Tait Berlier, WLJ Editor