Reminders on Risk Management

November 11, 2015 02:10 AM
 
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Enact financial protections to stay in the game

If you want to gamble, you don’t have fly to Las Vegas. Just plant a field of corn or raise a barn full of hogs. Although the saying goes that the “house always wins” when it comes to casinos, there are steps producers can take to make sure their chips can be cashed out when the time is right. 

For corn and soybean producers, crop insurance can be a great safety net especially in tough years, says Chris Barron, president of Carson and Barron Farms Inc., a consultant at Ag View Solutions and a Top Producer columnist.

“For our operation, crop insurance is probably the highest-value line item expense we purchase during the course of the year,” Barron says. 

Significant Protection. Crop insurance might constitute 3% of the cost of production for an operation but provide protection on 85% of the risk involved. It constitutes a large return on investment when needed, Barron notes. He typically insures all his fields to the highest available level.

“I look at crop insurance similar to fire insurance: Are you going to insure only half of your house for a fire? Or are you going to insure the whole thing?” Barron says. That mindset follows a trend seen in crop insurance during the past 20 years, with farmers purchasing higher levels of coverage on more acres. 

According to National Crop Insurance Services (NCIS), 205 million acres were insured in 1996, approximately 8% of them at the 70% coverage level or higher. In 2014, that number had increased to 295 million acres with more than 80% covered at the 70% coverage level or higher.

Producers need to make decisions about crop insurance before the start of planting season. 

“The earlier a farmer schedules a time to meet with their agent, the better,” says Laurie Langstraat, NCIS vice president of public relations.

On the livestock side, marketing is a challenge producers face perhaps even more acutely than crop producers because animals have to be processed at set times and milk has to be shipped in a timely way.

What Does It Mean To Me?
  • For crops and livestock alike, financial risk protections are essential.
  • Acreage enrolled in crop insurance has expanded to safeguard production.
  • Dairy producers anticipate volatility with the Margin Protection Program.

Secure Profitability. Hedging with puts and calls are a few ways Pagel’s Ponderosa Dairy and Dairy Dreams located near Kewaunee, Wis., has secured profitability. Greg Bethard, chief financial officer for the dairy, likes to have some sort of hedging position to manage risk.

A recent addition to risk management in the dairy industry has been USDA’s Margin Protection Program (MPP), which went into effect in 2014. When margin differences between average feed cost and milk price fall below a certain dollar amount selected by the producer, MPP kicks in protection.

“The overall goal is to avoid the really bad years and capture the good years,” Bethard says. 

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