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Managing risk for your farm

Your Farm Business

March 25, 2011
From Wayne Schoper and Rich Baumann, South Central College

Has farming the last few years felt a bit like a roller coaster ride?

"The price volatility we have experienced in recent years is really dramatic," says Brent Gloy, Purdue University agricultural economist.

Michael Boehlje, another Purdue University agricultural economist, says "With volatility seeming like it's here to stay, making plans to successfully manage risk on your farm is vital. The greatest risk is not knowing what you're doing,"

During a recent Purdue University webinar, Gloy and Boehlje suggested consideration of these recommendations to survive the current volatile agricultural environment.

1. Lock in Margins

Boehlje said today's budgeted profit is the highest in the last 20 years. "These are some of the best margins that you've had. We will not be able to keep these levels of margins at these high levels." Gloy added that input costs follow profits up, so with the recent high levels of profit, you can expect your inputs to also increase.

2. Buy Crop Insurance

Crop insurance may be the most obvious strategy, Gloy said, but it will help protect yield and price, if desired. "The products have changed over the years and gotten better," he said. "When you look at where revenues and costs are at today, risk is substantial. You're protecting significant amounts of revenue."

3. Consider Fixing Some Interest Rates

Interest rates are currently extremely low, Boehlje noted. "The markets are telling you to not expect interest rates to stay low forever." Boehlje suggested having a combination of fixed and variable rates since diversification has benefits. "Give some serious consideration to what the risk is with your current interest rates." Gloy added you should ask yourself: "What's the risk to your operation if interest rates would increase substantially?"

4. De-leverage: Pay Down Risk

Farmers have been experiencing earnings and cash flow that are at all time highs, which give them the opportunity to pay down debt. "We've got great cash flows today, so you should think about paying down debt," Gloy said. Boehlje added farmers have a window of opportunity to lock down interest rates or pay down debt.

5. Hold Financial Reserves

In the financial markets, working capitol is the first defense against a crisis, Boehlje said. "Increasing working capital and cash reserves puts you in a stronger position." In farming, Gloy said, we're very heavy at the bottom of a balance sheet (lots of land and fixed equipment). "Now is the time to get a little more at the top of your balance sheet."

6. Conservative Bidding/Buying

Gloy said that with all of the high prices farmers are experiencing today, it's easy to get caught up and lose track of the huge risk associated with high profits. "Be careful making long-term commitments based on short-term margins," he said.

7. Slow Growth/Fund with Equity

Remember the additional volatility means that businesses cannot support as much debt as in the past, Boehlje said. He suggested funding with equity, as it is much less risky and provides a cushion. Less expensive capital allows you to grow faster, Boehlje said. "If costs go up, you may have to grow less rapidly." Gloy added now is the time to prepare for any market changes. "Think about growing your business based of your equity. Equity is the ultimate insurance provider."

8. Make Investments in Operational Excellence

With any farm investment, Gloy said, your goal should be making costs of production go down.

Make wise decisions that:

Increase efficiency and yields and improve yield stability, while reducing operating costs

Avoid bad capital investment decisions based on tax management

Use cash reserves wisely

(This information is from Sara Schafer, Agweb.com)

 
 

 

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