8 Ways to Manage Risk for Your Farm

February 28, 2011 05:39 AM

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

“The price volatility we have experience in recent years is really dramatic,” says Brent Gloy, Purdue University agricultural economist.
With volatility seeming like its here to stay, making plans to successfully manage risk on your farm is vital. The greatest risk is not knowing what you’re doing,” says Michael Boehlje, Purdue University agricultural economist.
During a recent Purdue University webinar, Gloy and Boehlje suggest considering these recommendations to survive volatile agricultural environment.

1. Lock in Margins

Boehlje says today’s budgeted profit and loss 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 adds that inputs 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 says, but it will help project yield and price, if desired. “The products have changed over the year and gotten better,” he says. “When you look at where revenues and costs at are today, risk is substantial. You’re protecting significant amounts of revenue.”

3. Consider Fixing Some Interest Rates

Interest rates are currently extremely low, Boehlje notes. “The markets are telling you to not expect interest rates to stay low forever.”
Boehlje suggests 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 adds 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 says.
Boejle adds 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 says. “Increasing working capital and cash reserves puts you in a stronger position.”
In farming, Gloy says, we’re very heavy at the bottom a balance sheet (lots of land fixed equipment). “Now is the time to get a little more at the top of your balance sheet.”

6. Conservative Bidding/Buying

Gloy says 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 says.

7. Slow Growth/Fund with Equity

Remember that the additional volatility means that businesses cannot support as much debt as in the past, Boehjle says. He suggests funding with equity, as it is much less risky and provides a cushion.
Less expensive capital allows you to grow faster, Boehlje says. “If costs go up, you may have to grow less rapidly.”
Gloy adds 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 says, your goal should be making costs of production go down.
Make wise decisions that:
  • Increase efficiency, yields and improve yield stability, reduce operating costs
  • Avoid bad capital investment decisions based on tax management
  • Use cash reserves wisely
“Look at the net revenue gains associated with an investment,” Boehlje adds.
For More Information
Gloy and Boehlje spoke during at webinar by Purdue University. View the webinar archive.
Further reading: Managing the Risk – Capturing the Opportunity in Crop Farming by Michael Boehlje and Brent Gloy

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Spell Check

2/28/2011 12:28 PM

  Insurance, lock-in margins and prices, etc. are all fine and good but vehicles and equipment depreciation needs attention as well. Risk never seems to stop at financials so avoiding down time with crucial harvest equipment will go a long way to stay in business. Using synthetics in every possible application keeps the wheels turning in heat and cold in all types of equipment a lot longer and with less cost than with petroleum based oils.


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