The ability to manage debt determined who farmed and who didn't in the 1980s. In the 1990s, that deciding factor may be who can and can't manage risk.
In an era of escalating input costs, yo-yo crop markets and disappearing government programs, your ability to keep risk factors in check is more important than ever.
And there are new risk considerations. Environmental factors, labor management and time management have been added to the list of concerns. Your biggest risk, however, remains income protection. Without profit, other risk issues fade in importance.
Traditionally, price and income protection has meant using crop insurance and/or savvy marketing. Today, ag advisors believe you need to not only use both, but coordinate the two in your risk management program.
"There are new programs now that allow farmers to create a better cash flow, more of a safety net and greater peace of mind by covering more of the 'what ifs' of farming," says Vince Boddicker, Farmers Trading Co., Mitchell, SD.
That brokerage company works closely with the Hamaker Crop Insurance Agency, also of Mitchell, to coordinate cash grain marketing and insurance programs for their clients.
You don't need to explain risk to one of those clients - Delmar Guthmiller, Tripp, SD. During the 1980s he watched interest rates top 20%, land prices plummet and credit lines dry up. Those years forced him to tighten his belt and his operation, and cut corners he didn't want to cut.
You don't soon forget lessons like that.
"When you come up short on income, you have to recover somewhere down the road," says Guthmiller. "Sometimes you deny your family the necessities. Maybe you cancel health insurance. Or you don't get your machinery replaced when it needs to be, and you don't stay current."
While Guthmiller hopes his worst farming days are behind him, the pressures remain.
"We're always at risk," he says.
He and his son, David, farm 600 acres each of corn and soybeans, run 150 head of stock cows and are set up to finish 2,000 hogs a year.
Like many farmers, Guthmiller switched to Crop Revenue Coverage (CRC) for 1997. It's a new crop insurance option that guarantees crop income, rather than just bushels, for corn, soybeans, wheat and sorghum.
"It's much better as far as return, if you need it," Guthmiller says. "We didn't need it last year, but for those who did, it worked well. We're still vulnerable because it's based on the futures market. But it's the best we have at present."
Coordinating CRC coverage with a marketing program is truly a brain twister. But it pays.
Roy Smith, a Plattsmouth, NE, farmer and marketing veteran, has used CRC for two years.
"There's a lot of misunderstanding about how CRC works," says Smith.
Some folks believe that CRC can stand alone as a marketing plan and that farmers do not need anything else. Others say CRC has nothing to do with marketing.
"The truth is somewhere in between," says Smith.
"After some extensive analysis, I decided to use CRC on my entire farm in 1997," he reports. "CRC cost $1.97 an acre (7 cents/bu), more than Multiple Peril Crop Insurance (MPCI) for soybeans. But I was guaranteed at least $13.44 more income per acre."
Most importantly, CRC coverage allowed Smith to forward contract 65% of his insured yield (that's the coverage level he chose), knowing that if prices went higher, he would have either that many bushels to sell or the equivalent in cash to cover the risk.
"If you chose CRC coverage, the way to maximize your return is to sell the bushels you are guaranteed before harvest while prices are high," Smith says. "The odds of getting any payment from CRC are one to 25 based on my soybean history. But the chances of making money on a forward sale in May, backed by CRC, are two out of three. If you don't make preharvest sales, you haven't taken full advantage of your CRC plan."
"I use marketing to get an edge," says South Dakota's Guthmiller.
With CRC coverage on 65% of his production, he tries to sell consistently through the growing year, sometimes with forward contracts, sometimes with hedges.
"I use a marketing advisory program through my crop insurance company. It rides herd on the markets, but I make my own decisions."
The marketing advice that Guthmiller gets from the Farmers Trading Co. is based on cash sales, according to Boddicker.
"We emphasize cash marketing needs using preharvest pricing and, sometimes, options," he says. "The whole object of the program is to move grain and pay bills, not use the futures market and keep grain in the bins."
Bankers like the program as well as farmers, according to Guthmiller. And after his 1980s experiences, he definitely knows what bankers like and don't like.
"We run an analysis on the whole farm, all our enterprises, and get a printout that's half the size of an old Sears catalog," Guthmiller says. "Bankers like that because it's like an insurance policy for them. And they like to see the marketing plan. It shows the bank it's not as much at risk as it would be if we didn't have one."
Guthmiller sharpens his marketing tools in winter when he works the market daily.
"I speculate a little," he says. "It's a way I try and make some extra money. I get to know how the markets work, and it keeps me posted on what the markets are doing. You just have to use common sense, and make sure you don't get trigger happy."