Know risks, plan profits, act
The year ahead might not be a record breaker for crop profits like 2012, but it looks good for producers who can pull the marketing and buying trigger when margins present themselves. The Top Producer staff gathered five hot trends from expert interviews throughout the year:
Become a True Profit Hedger. An increasing number of farmers are learning from the books of successful grain and agribusiness companies: Don’t be exposed. This means locking in inputs and commodity prices. That’s called locking in a true profit margin, which leaves nothing to guesswork. Even more farmers will be true-hedging in 2013.
Be Risk-Averse. Managing risk doesn’t stop with crop insurance and forward price selling. Despite low interest rates, you want to be in a strong cash position. Experts recommend a minimum of 33% working capital to revenue and two months’ worth of expenses in the bank, CDs, money market accounts and investments readily convertible to cash. This protects you from a downturn and gives you cash to take advantage of asset deals when ag undergoes a correction.
Think Global. Keep an eye on these four international hot spots that will influence profits. If Brazil and Argentina’s corn crop is less than ideal this winter, prices could sail sky-high. How far will Chinese economic growth tumble—or rebound—and what impact will that have on meat consumption and imports of oilseed and grain? Will Europe resolve its debt problems? The Black Sea region, particularly Ukraine and Russia, will likely plant more of everything to take advantage of rising prices.
Manage Volatility. Volatility extends far beyond price. For instance, corn and soybean growing regions in the U.S. are moving to the north and west, which are home to more volatile weather and varying production. For a businessperson, this means fluctuating profits, and that must be taken into consideration when planning. For example, if weather around the globe next year is good, corn could be in the $4 range at harvest, but if it’s poor it could be in the $8 range.
Lock in Cheap Money. Eventually the U.S. economy will turn around, and when it does, look out, interest rates! Therefore, lock in as many of your interest rates as possible in fixed-rate middle- and long-term instruments, with the absolute minimum in short-term variable rates. When rates are 4% and 5%, the pressure can only be up.
- February 2013