Risk Management: The Game has Changed.....
May 16, 2013
For many of the farmers I speak with out in the field, they have very little if any new-crop sold. For those in that position, I believe they have little choice but to get caught up sooner, rather than later, despite my theory that we could see a major unforeseen rally in the next 60-90 days. The problem is "IF" the rally doesn't come to fruition or fully develop, the downside could be too extreme for most producer to handle on 80-100% of their crop, especially, if the following couple of years produced similar results.
As you know, I firmly believe in the fact "risk management" is everything for today's farmer. Losing a finger toe is one thing, but with todays price swings, not properly managing your "risk" could quickly result in losing an entire arm or leg. I have come to the conclusion modern day farming has become very similar to playing in a poker tournament. Take the "World Series of Poker" for example, there is a huge prize purse available for those that can hang in there and make it to the final table...the key however is you have to keep yourself in the game. Look at what happened to farmers in the 80's or even those who were knocked out of the game in the early 2000's, they missed the big crop paydays and the massive land appreciation run, that has occurred the past few years. Very similar to US home builders who got out over the tips of their skis and where knocked out of the housing market, now they are missing the wave back to the upside.
Bottom-line, regardless of opinions or predictions about short-term or long-term market direction, the goal as a producer has to be to keep yourself on the surf board. The problem is as the price waves get larger and larger many producers lose site of their objective, misjudge or solely focus on the current wave they are riding, ultimately underestimate the power of the tides...and more importantly how quickly those tides can change. With this being the case, I prefer to focus on managing "risk" rather than trying to predict the unpredictable. When the waters present themselves with an opportunity for profit, while at the same time reducing my overall exposure and risk of getting knocked off the surf board, I like to take take advantage of that situation. In poker terms, I pulled a few chips off the table and have moved one step closer to the final table. Bottom-line, Yes, make sales now if you haven't done so. Lock in profits and reduce your risk of getting knocked out of the game!
CLICK HERE to get more of my insights on how the game is changing!!!!