We can all think of a few words to describe how 2019 has treated us so far. The most polite of which is uncertainty. Beginning with a spring which allowed virtually no field work and large areas of prevented planting. After varying moisture levels throughout the Midwest in July, there’s a large unknown for what kind of production levels will be come harvest. As producers try and manage risk and market grain as a result of this challenge, there are a few things to keep in mind. Anytime we are dealing with uncertain times, it’s a good idea to re-visit a farm’s risk management strategy. Let’s spend some time discussing some top tools and tricks for effective risk management.
When I think of risk management for grain farms, I tend to focus on three main concepts: Understanding cost of production, while combining an effective crop insurance policy with an effective, and written grain marketing plan. By building a management plan utilizing these three concepts, you will be well on your way to improving your farm’s stability during times of market and production risks.
To effectively manage risk, a grain producer should begin by determining their cost of production. While this is one of the most important things to have a grasp on, it is often skipped by producers — and for valid reasons. It can be one of the most challenging to calculate.
It can be difficult to accurately calculate a farms breakeven cost until final yields are known. Yield is a large variable until harvest, as are some expenses like grain drying. I find that the top producers at managing risk often start the year with an estimated breakeven. You can mimic this by using APH (actual production history) yields and normal costs, and make slight adjustments throughout the year as more information is known. Even though this won’t be 100-percent accurate, it’s amazing how close it can be with a little effort, and help you be more prepared.
The next two points really belong together, but let’s start with discussing crop insurance. You really can’t discuss the risk management plan of a grain operation without crop insurance. I will quote a line from my own crop insurance agent, which has always stuck with me. “Crop Insurance is all about how much production and market risk you want to bear yourself, and how much you want to pay the insurance company to bear for you.”
With the number of crop insurance policies available today, there’s an appropriate policy to fit every operation. Your crop insurance partner should be viewed as a vital member of your risk management team. They should be able to advise you on the pros and cons of each policy, as well as how they would work to manage the risks you’re concerned with. It’s also important to understand your grain marketing plan when choosing your insurance product. If your agent is not comfortable in advising you on these issues, I would encourage you to find a crop insurance partner who is.
The last cog in the risk management wheel is combining your breakeven cost, profit targets and crop insurance to form a marketing plan. An effective marketing plan should use both price and date targets in writing, and the plan should be constantly followed.
It’s important that a marketing plan is flexible enough to change based on the marketing year. However, it’s important that plans are altered and not forgotten. It’s all too easy to get caught up in a market rally and forget to execute on sales. For someone getting started in marketing plans, I recommend the book “Grain Marketing is Simple, it’s just not easy” by Ed Usset. This book was recommended to me in college and I try to get in the habit of reading it on a regular basis.
I like to think of these three concepts like a stool. If one leg is missing, it will not stand. Effective risk management requires a combination of all three. Although breakeven analysis takes some effort, many local universities offer tools to make this easier, as does Compeer with our “Margin Manager” tool available on Compeer.com. I will go out on a limb and say that once you take the time to calculate your break-evens, you will wonder how you ever managed without it.
With today’s uncertainties in the ag industry, effective risk management is more important than ever. In a thin margin environment, the difference between profitable operations, and the alternative, can be as small as a few grain marketing decisions — or not properly managing production risk. It isn’t always about doing one big thing right, it’s about focusing on the small things that can make a big difference.
For additional insights from Foerder and the Compeer team, visit Compeer.com.