Growing wheat is no walk in the park. It’s a process that requires diligent care starting even before the seed goes into the ground. The thing about growing wheat, or any commodity, is that even if farmers do everything perfect, their fate is still held in Mother Nature’s hands. The process of growing wheat is broadly similar across the country, but there are differences as well. The discrepancies in production can be derived from growing region or type of wheat. To understand the production of wheat will be helpful in watching fundamental factors such as weather and input costs. These factors can be drivers of the wheat futures market.
The farming process starts before the seed even goes into the ground. This is where the first decisions need to be made. Some farmers conduct a summer tallow. This is a moisture conservation practice that consists of plowing the land in the summer. Farmers then need to decide whether or not they will apply their fertilizers in the fall or summer. This decision is dependent, but not exclusively, on whether the farmer is planting spring or winter wheat. Most U.S. wheat farms use nitrogen fertilizer, but some report using phosphorus and even fewer use potassium. The last two element based fertilizers are usually used alongside nitrogen based fertilizers. This is a major input cost of farming and can account for up to 45% of variable wheat farming costs. Spring wheat tends to accumulate more weed growth and requires more fertilizer. Wheat is a very versatile crop when compared to the other grains. For that reason, it’s grown in a wide variety of conditions. Fertilizer costs are extremely variant depending on the soil nutrition and wheather of the farmland that hosts the crop. As a whole, wheat is much less chemically intensive to grow than corn or soybeans.
The seeds are planted in the fall for winter wheat and in the spring for spring wheat. The seed input costs vary on which strand of wheat you plant and whether or not genetically modified seeds are used. On average, seed costs account for about 20% of variable costs. All though a very small percent of wheat farms report using insecticides, this is a vulnerable point for the crop. Once spring hits, both winter and spring wheat grow rather rapidly. During this process wheat requires a fair amount of water, especially as harvest nears. Very few farms report using irrigation, with the overwhelming majority who do so found in the Pacific growing regions. Irrigation does increase yields, but it is an expensive process. As the wheat matures, it becomes susceptible to a fungal rust forming on its leaves. This is one of the leading fundamental worries farmers face, although very few report using fungicides. Once the wheat is ready for harvest, it is collected with a combine and the grain is removed from the stock with threshing equipment. Machinery (repairs included) and fuel costs make up approximately 15% of the total variable costs associated with farming wheat.
Fertilizer, seed, fuel and machinery account for approximately 80% of the costs of farming wheat. These costs differ, sometimes dramatically, on a year to year basis. The higher the price of wheat is, the more the value of increasing yields becomes. If the wheat futures market is trading at $10 /bushel, farmers will be willing to spend more money to increase production, which will result in a higher demand for and higher prices of input costs. Having a basic knowledge of the farming process will assist you in your fundamental understanding of the wheat futures market.
(Ali, Mir B., Nora L. Brooks, and Robert G. McElroy. Characteristics of U.S. Wheat Farming: A Snapshot. Washington D.C.: Economics Research Division: USDA, 1994.)
(Craig L., Doppins and W. Alan Miller,. “2007 Purdue Crop Cost & Return Guide.” Purdue Extension Feb 2007 06 Mar 2009 .)
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