Agricultural production has been challenged by many factors this last year.
Swine production enterprises have experienced nearly two years of a down cycle. Balance sheets that were healthy just two years ago have seen working capital eliminated, pushing many producers to the brink of insolvency.
Yet there are a few producers who have managed through this volatile period with less financial pain. When we look at these operations, it becomes apparent that the differences can be found in risk management practices. The managers who remained committed to enterprise analysis and using risk management tools such as futures or options on futures contracts to manage the downside risk of hog prices, coupled with the upside risk in feed costs have maintained the equity in their businesses.
Some may have thought they were giving up the great profitability that was available several years ago, by using risk management tools that cost money. Today, it is apparent that taking slightly smaller profits by using these tools during those times and remaining disciplined going into the downside of the market is paying off in equity management.
In marketing you may find success while others experience failure. The challenge we face in production agriculture is to manage the risks that we take when we invest capital into a crop with the intent of making a profit.
One powerful risk management product that helps manage much of the production risk is the use of crop insurance. These products help us to manage a portion of our production and revenue risk. The biggest challenge is, that the crop still has to be sold to manage the equity risk. It is not enough to rely on the crop insurance to be the marketing plan.
The fact remains that grain producers still have advantages that the livestock sector does not have, in the form of government price supports and subsidized crop insurance.
With the dynamic markets that we are managing today, it may be a good time to start planning for the 2010 crop year. We need to start working on cost of production, risk management (crop insurance) and marketing plans for the next crop. Land rent negotiations, crop rotations, storage requirements and equipment needs should be in the planning stages for the next crop year.
Our experience has been that time advances faster than we think and early planning will help manage the emotion of business decisions. We must remember that 70 percent of the time the best marketing opportunities to price grain are before it is planted. This opportunity starts today for the 2010 crop.
I will always remember my Grandfather telling me, “Son you need to be zigging while everyone else is zagging.” As I grow older, I have discovered that following the crowd and doing everything that the neighbors are doing is not always in my best interest.
As this crop year progresses, let us remember to be thankful for our many blessings and mindful of those less blessed.
Grain Angles is written by Tom Neher, AgStar Financial Services vice president of agribusiness and grain specialist from Rochester, Minn.
