WEST LAFAYETTE, Ind. — Crop farming is a risky business, and farmers need to successfully manage that risk now more so than ever.
There are two distinct types of risk farmers need to be concerned with — operating risk and financial risk. Operating risk is what’s associated with grain prices, input costs and yields. Financial risk refers to the way producers finance their business — whether through debt or their own equity.
Both types of risk have intensified in the last few years as the volatility in commodity markets and input prices has caused grain producer’s profit margins to become unstable.
Increasing volatility
“The volatility we’ve seen in the margins has increased dramatically since the mid-2000s,” said Purdue Extension agricultural economist Mike Boehlje.
He said prices and, more importantly, costs were fairly stable for most of the ’90s and the first half of the following decade.
“But since about 2005, we’ve had significant volatility, not only in prices but also in costs, resulting in a dramatic increase in margin volatility.”
On an uncertain roll
During the last three years, farmers generally have seen much higher grain prices. But Boehlje is quick to point out how quickly that changes.
“Just look at what’s happened since August of this year to prices,” he said. “We’ve now taken over a dollar off of corn prices and closer to $2 in some markets.”
Four things you can do
Even with all of the uncertainty, Boehlje said there are strategies to help farmers manage their risk.
The first is by locking in margins when both commodity and input prices are favorable.
“Margins can be protected by using futures markets or contracting to lock in grain-selling prices and by contracting input prices for fertilizer, seed and chemicals,” he said.
Second, farmers need to buy crop insurance. Determining the level at which to insure the crop can be a challenge, but Boehlje said he recommends higher levels of coverage right now because of the volatility.
Third, producers need to pay special attention to managing financial risk, especially when it comes to debt.
“Be careful with borrowing money,” Boehlje said. “Now may be the time to pay down a little debt and position yourself to be able to handle this increased volatility by not having as much debt.”
For those producers who already have long-term debt, Boehlje suggested taking advantage of historically low interest rates by fixing their loan rates.
And, fourth, farmers need to use sound operating procedures, including taking advantage of the best possible seed and technology, and making sure operating costs are under control.
“Don’t get lax in cost-control in good times because that can certainly hurt you when times aren’t so good,” he said.
