Anticipate Risk With Flexible Strategies

April 1, 2019 10:55 AM
 
Manage your farm’s marketing plan, working capital, crop insurance coverage and vulnerability to conquer your financial tightrope

Improve Grain Marketing Skills

Riding the volatility in today’s commodity markets can take your breath away. To help manage this constant category of risk, follow these grain marketing strategies from Farm Journal Economist Chip Flory.

  • Categorize yourself. Decide before you begin a risk-management plan if you’re a conservative or an aggressive marketer. This will help you match the right marketing tools with your comfort level.
  • Know your production costs. Don’t use university benchmarks; use your actual production costs so you know when you’re locking in a profit.
  • Involve your partners. If you’re in charge of grain marketing, take charge. Involve other key business partners to keep track of changing yield potential so revenue opportunities are always top of mind.
  • Make your own decisions. Gather information and opinions from a manageable number of sources, but always make your own decisions on acceptable prices.
  • Write it down. Record when and why you made a sale. Undoubtably, you will make some sales too soon or too late, but if you have a record of why you made the sale, it can keep you from kicking yourself later.
  • Don’t gun for the highs or the lows. Trying to be absolutely perfect in your marketing endeavors will almost always guarantee failure—and it’s why some potentially high-priced bushels are sold months later for much less.

Develop a Working Capital Plan

Do you need to borrow a larger line of credit? Do you wish you had more financial cushion?

“To improve working capital, there are only two things you can do: spend less money or increase productivity,” says Chris Barron, a financial consultant at Ag View Solutions and Iowa farmer.

Consider these options to improve your financial standing, Barron suggests.

1. Enact a purchase freeze. Let everyone in the operation know no major purchases can occur for a set period of time. Agree any expense more than $500 must be approved.

2. Take a hard look at compensation. Consider trimming salaries or not replacing team members. See if you can get by with your current team instead of outsourcing jobs.

3. Consider restricting debt. Talk with your lender about your loan options so they understand why you want to restructure debt (and that you’re not just covering up losses).

4. Liquidate unused machinery. There’s cash sitting in assets that aren’t generating any revenue for the operation. Even unloading less-expensive equipment can add up to decent savings.  —Sara Schafer


Make Smart Crop Insurance Decisions

As you make your 2019 crop insurance selections, you won’t be faced with many new products. But your operation has likely seen changes—higher yields and financial hurdles. So, take the time to evaluate your coverage plan.

As you whittle down production costs, you might be tempted to reduce crop insurance coverage. Before you make the cut, weigh the pros and cons.

“Farmers need to talk to their bankers to find out their banker’s biggest concern with them for 2019,” says Jamie Wasemiller, analyst and crop insurance agent with the Gulke Group. “You might decide you want to reduce insurance to cut costs, but they might prefer you protect more of your crop and revenue with insurance.”

Farmers have harvested historically high yields in the past few years. Since your actual production history (APH) yield is used to set the guarantees under the Federal Crop Insurance Corporation, analyze how your current coverage levels compare, Wasemiller suggests, to make sure you’re not leaving a lot of bushels unprotected.

If you fall into this category, consider adding a private crop insurance product for additional protection. Private crop insurance products address risk exposure that’s not adequately protected through the traditional crop insurance products, says Mike Scherer, president of Ag Risk Solutions.

“The most common private coverage we see used is hail and wind coverage,” he says. “Especially with so many of our clients moving to enterprise units, private hail and wind coverage can be a great cost-effective way to address the most common cause of spot losses.”

Wasemiller also suggests looking at increased coverage election (ICE) and revenue accelerator max protection (RAMP). Both provide additional coverage for when production and/or revenue losses are over or under the multi-peril guarantee.

Another crop insurance option to consider is the trend adjustment and yield exclusion options, Scherer says. “We have yet to find a situation where they are not cost-effective and allow you to get more coverage for less premium.”

Review your options now to make the best selection. “Get your intended acres to your agent so they can put together an accurate and comprehensive quote showing your options,” Scherer says. “Remember each county, crop, and practice are separate coverage decisions.”  —Sara Schafer


Strategic Business Decisions to Manage Risk

AVOID

  • High Probability
  • Large Consequences

Avoidance is the process of structuring the business so certain types of risk are nonexistent.

Tools:

  • Don’t Own
  • Don’t Do
  • Don’t Say
  • Don’t Expose

REDUCE

  • All Risks

Reduction is the process of lowering the risks associated with the business venture. There are two ways to implement avoidance or reduction strategies: Exit a particular business or reposition current operations.

Tools:

  • Safety Procedures
  • Pooling
  • Segregation
  • Diversification

TRANSFER/SHARE

  • Low Probability
  • Large Consequences

Transferring risk occurs when one party lowers their risk by shifting it to someone else, often for a specified price.

Tools:

  • Rent
  • Insurance
  • Marketing Tools
  • Government Credit
  • Agreements

RETAIN

  • Small Consequences

The objective of assuming or retaining risk that would normally have been borne by some other party is to maintain control or enhance overall profitability.

Tools:

  • Absorb
  • Deductibles
  • Coinsurance
  • Self-Insurance
  • Ignore
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