Keeping tabs on your emotions is paramount to good risk management.
"You need to set price targets based on technicals or what you fundamentally think the market will do, and, most importantly, execute those price targets," says John Melius, farm market risk manager with Hurley & Associates. "Don’t let emotions take over."
When developing a risk management plan, Melius and his clients first determine cash flows and cost of production. "Once we know what we need, we can devise a plan of attack," he says.
In an up market, producers need to devise strategies to protect downside risk while leaving the upside open. "We then monitor the market and set red flags," Melius says. "If we get to a profit level that is higher than is realistic—say, over 30% profit on revenue—it’s a red flag telling us we should get more downside coverage and make more sales."
Melius likes to think of risk management as a three-legged stool, with the banker, producer and risk manager each representing a leg. An open relationship with his/her banker can help a producer manage fluctuations in market carry and basis.
"Producers need to pay attention to basis when they are doing their market plan," Melius says. "Basis fluctuations can change their bottom lines immensely."