Farmers in fear
Risk of higher wheat prices has many in the industry ‘scared to death'
Farmers in fear

By Jim Stafford

Published: March 15, 2008

Prices paid to Oklahoma wheat farmers for their grain have surged to historic highs, but the prospect of $12-a-bushel wheat at harvest has yielded a surprising side effect, said farm economist Kim Anderson: Fear.

The July wheat contract on the Kansas City Board of Trade closed at $12.21 Friday, down 44 cents from the previous day, but still hovering near historic levels.

So, what is to fear from wheat priced at three to four times what it was just five years ago?

"They are scared to death because their risk is so much higher than it has been,” said Anderson, a professor and extension economist at Oklahoma State University.

"The story here is not just that farmers are receiving three times higher prices than they did three years ago,” he said. "His cost of production is two-and-one-half to three times higher than they were three years ago, and when the cost of production goes up, his risks are three times higher.”

The inputs that have contributed to the rising cost of production include fuel, transportation and fertilizer, said Mark Hodges, executive director of the Oklahoma Wheat Commission.

"All of those are at record highs, as well,” Hodges said.

The rising commodity prices — most other grain prices are at historic prices, as well — have created a fragile bubble in the agricultural community, Anderson said.

Grain elevators are facing the prospects of opening wider lines of credit to make cash payments for the 2008 crop when it is sold in July. Elevators that permit farmers to "forward contract” their crop must meet margin calls — or interim payments — until the crop is harvested.

A major crop failure like the last two years would be catastrophic, said Mike Cassidy, president of Cassidy Grain in Frederick.

For instance, Cassidy grain is going to need a $10 million to $12 million line of credit this year after operating on a $2 million line of credit for the past quarter century, Cassidy said.

"You stumble your toe these days and you are out of business,” Cassidy said. "These historical high prices are going to radically change the way the grain merchandising industry operates.”

If farmers have forward contracted their wheat, meaning they have sold their crop in advance at a predetermined price, but can't deliver it because of a poor harvest, it will cascade throughout the industry, he said. Grain elevators will demand payment from farmers, who have nothing to pay. Banks will demand pay"It's a financial market,” he said. "There are billions and billions of dollars being invested (in grains). It's Las Vegas. It's not the wheat market.”

Despite all that, wheat growers are not exactly cowering in their fields, said Tim Bartram, a Logan County wheat farmer and executive director of the Oklahoma Wheat Growers Association.

"From a grower's perspective, we feel like (prices) are getting where they need to be or getting close to have a chance of making any money,” Bartram said. "I hear some rumblings from an elevator point of view, but if we stay (at these price levels) for a period of time, those issues will straighten themselves out.”

Farmers are more concerned with drought conditions and the health of their wheat than they are with $12 wheat prices, Bartram said. The financial situation leaves farmers more "nervous” than scared, he said.

So, has the industry said "so long” to $3 per bushel wheat for good?

"I certainly hope so,” Bartram said.

"If we haven't, then the price of fertilizer is going to have to come way down and the price of fuel has to come way down and we are going to have to say goodbye to a lot of wheat farmers if we get back down to that level.”

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