Wheat Producers Should Pay Attention

Who would have predicted that gasoline prices would be below $2 per gallon (down from $3.50 in June 2014), that oil prices would be below $50 per barrel (down from $110 in August 2014), and that Perryton, Texas, corn prices would bottom out below $3.40 (down from a peak of $8.90 in August 2012)?  South West Farm Press reported that wheat producers should learn from these price declines.

Wheat prices have declined. In July 2014, wheat prices were near $8.50. By June 2014, cash wheat prices were near $7.50. By the end of September 2014, wheat prices had fallen to $5.30, which is not nearly as low as wheat prices could go.

What current oil, gasoline, and corn prices show is that if U.S. wheat ending stocks go above 850 million bushels and world wheat ending stocks go above 7.5 billion bushels, Oklahoma and Texas cash wheat prices could go below $4. In June 2010, Oklahoma and Texas cash wheat prices were near $3.50.

The good news is that relatively tight hard red winter wheat stocks and cold temperatures, with little to no snow cover, are supporting wheat prices. Oklahoma and Texas wheat prices have increased from the $5.30 September low to near $6. At this writing, wheat may be contracted for 2015 harvest delivery for about $6.05 in central Oklahoma and about $5.90 in the Texas Panhandle.

At this writing, U.S. hard red winter (HRW) wheat 2014/15 marketing year ending stocks are projected to be 227 million bushels compared to a five-year average of 333 million bushels. The HRW wheat stocks-to-use ratio is 30 percent compared to a five-year average of 37 percent. Relatively low HRW wheat stocks, the number of planted acres and current wheat conditions lower the odds of 2015/16 HRW wheat ending stocks going above 333 billion bushels and wheat prices going below $4.50.

A negative price factor is the value of the U.S. dollar compared to other major currencies. Since early July 2014, the index measuring the value of the U.S. dollar to other major currencies has increased from 80 to near 92.

A 15 percent (80 points to 92 points) increase in the value of the dollar effectively increases the cost of exported wheat by 15 percent. Assume that the HRW, 12 percent protein wheat price at the Texas Gulf (FOB) is $7.50. If the index of the dollar was 80 rather than the current 92, the effective price would be $6.52. The increased value of the dollar has effectively made the cost of U.S. wheat about $1 higher to foreign buyers.

Producers could believe that $7.50, as compared to $6.50, implies a higher farm level price. The fact is that this $1 has no direct impact on producer prices. A direct impact is that the higher value of the dollar increases the cost of U.S. wheat, export demand is less and producer prices are lower.

Producers ask what the petroleum industry’s reaction will be to extremely low prices. High-cost oil wells will be shut down; fewer oil wells will be drilled; and the least efficient distilleries will be closed, resulting in decreased supplies and higher prices.

Evidence exists that for the most part, the petroleum industry has prepared for lower prices. Extremely low prices happen. Smart managers prepare for extremely low prices by building cash reserves. Then when prices go back up, they will be in business to take advantage of profitable prices.

Wheat producers need to do the same thing. That is, know that $4 wheat is a possibility and that staying in business requires being prepared with cash reserves and having a plan for extremely low prices.

Issues with Mineral Rights

You're sitting at home and there's a knock at the door.  It's an energy company wanting to buy your mineral rights.  What do you do?

With all the new issues coming up regarding energy mineral rights is becoming a major and new issue for some farmers depending on where they're located.

Despite the monetary gain a farmer could make there are environmental issues at stake.  Particularly oil/gas drilling.  And even more so with hydraulic fracturing (fracking) method of extracting natural gas.

In an interview by Delta Farm Press, James Isonhood, Mississippi assistant attorney general said, "There is a lot of misinformation about this."

Making a mineral rights deal is a very serious business he said.

"If someone knocks on your door offering to buy mineral rights, the first thing you need to do is find a lawyer who is knowledgeable about oil and gas mineral rights.  Don't use just any lawyer - be sure it's one who has knowledge of and is experience in dealing with the complicated issues in mineral rights."

Just because you own the land doesn't mean you own the mineral rights.  The mineral rights may have been sold separately many years ago.

"If someone owns the mineral rights for your property - dominate estate - they have an absolute right to recover those minerals," Isonhood says.  "If you own the mineral rights and sell or lease them to a gas company, that gives them dominate estate."

Determining who owns the mineral rights can be difficult.  "You may have to go all the way back to the original patent in the 1800's," He says.  If the property is inherited then the land would go to the heirs.  If not, then it would go to who ever it was sold to.

If their are several heirs to the property then things can get really complicated.  Have you ever had to get numerous people to make a decision?  It's like herding cats sometimes.

Stanley D. Ingram, an attorney in Jackson, Miss said there is no such thing as a "standard" oil and gas lease form.  "If there is one thing certain about today's oil and gas lease, it is that it's uncertain.  Every oil and gas lease is unique, requiring the utmost of the lawyer's review and interpretation."

How to Make Money Off Cropland

There are many ways people get revenue off of cropland.  The most traditional way is through the annual income, such as cash rent or share crop, and land appreciation.  

Annual income can come in various different ways.  One way is cash rent.  This is usually gain by receiving bids from farmers and they tend to be competitive.  This is the way most first time investors go.  It's the simplest way and has the least amount of risk to the investor.  The second way is share crop.  This tends to be done by more experienced investors.  They are typically 1/3 2/3 shares.  The positive is the investor usually makes more money this route.  However, they are usually more involved in the day to day decision making and if the crop fails or comes in poorly they take a hit along with the farmer.  And the final way to make income is through land appreciation.  I've gone over this a lot but to summarize it, cropland averages a 6% increase in appreciation annually over the last 40 years.  And we saw a massive jump in the last two years averaging 10% to 30%.

Now for the additional streams of revenue most people don't think of.

One additional source would be mineral rights.  This pertains to everything below ground of the property.  Things such as oil and gas leases and coal are the most common.  Another one is hunting leases.  The price of a hunting lease varies from property to property and how it's decided.  For example, you can decide the lease per acre, per hunter or, if it's a wetland, it could be a wetland lease.  Sub surface water rights is also another issue to think of.  Not too big of a deal in wet areas but places like western Kansas it can be an issue.  There are also government programs in place.  There is the conservation preserve program or CRP.  That is when the government pays the land owner a yearly amount to allow the land to grow naturally.  The is wildlife habitat incentive programs or WHIP.  It's similar to CRP but instead of just leaving it alone the government creates a habitat to promote wildlife growth.  There is also wetland reserve program or WRP.  Similar to CRP.  Allows a wetland to remain untouched and promote wildlife growth.  And finally there are wind leases.

Wind leases are becoming more and more common.  The issue is you have to have your land adjacent to other turbines to tap into a wind lease.  You have to think of it like an electric grid.  And it's expensive to put in so they will only add on to wind farms and rarely put up new ones.