When we think of the term risk management, most of us — me included — think about the risk of pricing our crops and/or livestock. Obviously with the extreme volatility in the corn and soybean markets today, risk management is a huge issue. Knowing how to use futures, options, hedge-to-arrive contracts, crop insurance and other marketing tools are vital to the survival of a grain farm in the years ahead. If a person doesn't know how to use these tools, they had better hire a service that does to help them through these extremely volatile times.
But after marketing, there is much more to risk management today than just the obvious reasons we have already discussed. The first three that come to mind in a modern farming operation include:
Production practices that can limit risk
Let's start with what I call margin management. As previously mentioned, marketing crops and knowing which tools to use is probably the highest on the list for everyone in risk management. Up until a couple of years ago, a farmer could usually just buy the inputs he needed when he needed them. However, in the last three years, input costs have fluctuated much more than in previous years. There is now as much risk of buying inputs at the wrong time as there is selling crops at the wrong time.
As an advisory firm, we now find as much of our time being spent advising farmers on when to buy diesel fuel, natural gas and fertilizer as we do advising corn and soybean sales. The issue: The net cost of the inputs or the gross value of the grain sold is less important than the difference between the costs and revenues. We are trying to lock in the profit spread (or margin) between inputs and outputs. This is a different thinking cap than most of us have had to use in previous years.
Production practices also, when implemented properly, can help reduce risk. Proper seed selection is a must. Appropriate planting time is a must. Fertilizer application rates and proper use of insecticides and herbicides, depending on the crop, are also musts. This should be an obvious risk-management area, but is certainly worth mentioning and keeping on the books.
The third area of risk management is management succession. This is one most growers don't want to talk about and would just as soon ignore. What happens to your farming operation if the key decision maker abruptly and unexpectedly goes on to the next phase in life?
AT A RECENT seminar, a young farmer asked for my advice on this very specific issue. He farmed with his father and his uncle. The dad is a mechanic and the son is a tractor driver. The uncle was killed in a tragic accident just before Christmas, and was the key decision maker for everything. He said to me in a very emotional tone, “Dad and I don't know what to do. Neither one of us have ever made a management decision of importance in our life.”
At least in this situation the son realized they have a problem, which is the first step toward finding a remedy. The worst of situations is one like this where no one realizes there is a problem.
Marketing crops is an important element of risk management — but not the only element. It is vital to recognize every farming operation where our risks lie and have a plan for keeping those risks at a minimum.
Richard Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subsription and information on Brock service, call 800-558-3431 or visit www.brockreport.com