PENDLETON - Last year when the region's primary wheat crop was selling for $3.85 per bushel, Al Gosiak thought offering 12 cents per pound for canola was generous.
Gosiak, president and chief executive of Pendleton Grain Growers, said times have changed with wheat prices at near-record levels.
Thursday's prices for dark northern spring wheat were $6.78 per bushel for July delivery and $6.80 for December delivery, he said. And soft white wheat was at $6.05 for July delivery and $6.19 for December delivery. A year ago it was selling for $3.85 delivered in Portland. Transportation costs producers about 50 cents per bushel, so local growers averaged about $3.35 per bushel.
Gosiak said PGG aimed to pay canola producers a price that would equal or exceed what they could earn growing soft white wheat.
"A year ago, wheat was trading at $3.85 per bushel," he said. "That was pretty easy to do."
Breaking down the costs, Gosiak said Umatilla County growers average about 70 bushels of wheat per acre, so $3.35 gross per bushel times a 70-bushel average equals $235 gross per acre.
Gosiak said fields that produce 70 bushels per acre of dryland wheat also should produce a ton of canola seed per acre. So he calculated that to bring a canola grower $235 per acre, PGG would have to pay 11.75 cents per pound for the crop.
"We'd have to pay 12 cents per pound for it to be even in the ballpark," he said. "And that's exactly what we did."
It was a 50-percent increase when PGG announced its price last summer. In 2005, canola seed was selling for 8 cents per pound.
A ton of canola seed run through an expeller produces 70 percent meal, from the seed hulls, and 30 percent oil. Gosiak said PGG can sell the 1,400 pounds of meal for cattle feed at 8 cents per pound to generate $112. From the $240 per ton it paid for the canola, that leaves $128 it must receive from the 600 pounds of canola oil to break even.
That puts the break-even value of the oil at 21.3 cents per pound, or $1.62 per gallon. Canola oil weighs about 7.6 pounds per gallon. But then there are the costs to crush, clean and convert the oil to biodiesel.
Gosiak declined to reveal those numbers, but said some are offset by a federal blending tax credit and the premium biodiesel brings at the pump. He believes biodiesel brewed from 12-cent canola would be competitive with petroleum diesel at $2.44 per gallon before taxes.
Echo farmer Kent Madison, who is growing enough canola this year to supply biodiesel for his farm, said the economics of growing the crop on his irrigated farm are similar to those Gosiak described on dry land. Madison has the increased irrigation cost, but also enjoys a 50-percent greater yield.
In his case, an acre of canola yields about 1.5 tons of seed, which produces 2,100 pounds of meal and 900 pounds of oil. Madison estimated the value of his meal at 8.75 cents per ton, or nearly $184 per acre. The value of the oil, he said, is $2.75 per gallon, or $338 per acre, bringing the gross value of the crop to $522 per acre.
At 3,000 pounds of seed per acre, Madison's canola is worth 17.4 cents per pound gross. And because his biodiesel processing costs are about three cents per pound, he could pay another grower 14.4 cents per pound for canola seed.
With growers eligible for the 5-cent tax credit, he said, "That's pretty competitive with $6 wheat."
Wheat prices have changed the equation, Gosiak admits, making the 12-cent-per-pound price of canola not so attractive.
"Today versus $6 wheat, it doesn't work," he said. "It would be difficult to pay canola growers enough premium to be equivalent to the record prices of soft white wheat."
He doesn't expect the wheat market to remain this high, and when prices stabilize, he said, "we'll find a number that will make canola competitive."
At today's wheat prices, canola growers would need 21 cents per pound for their crop to remain competitive, he said. But with the state's new fuel standard that offers growers a 5-cent-per-pound tax credit for renewable fuel feedstock, Gosiak again started punching his calculator.
"Sixteen cents," he said. "I can make that work."