Four ways to keep your eye on the profit prize
A pandemic, war on the other side of the world or roller coaster prices spawned by such black swan events can paralyze decision makers. What should you do? Go back to basics, and focus on what really matters.
“It’s all too easy to get caught up trying to outguess the market,” says David Widmar, economist at Agriculture Economic Insights. “That focus puts more of your results in the ‘luck’ basket rather than your decision basket.”
Instead, follow these steps:
1. KNOW YOUR NUMBERS
Average costs are less representative than ever, and differences in the budgets for neighbors can vary greatly. One example: When and at what price you lock in fertilizer.
“When we talk about knowing your numbers, we mean understanding your financial statements, but also understanding your cost per acre,” says Matt Erickson, agriculture economic and policy adviser at Farm Credit Services of America. “Six months has made a huge difference. We are experiencing general inflation not seen since 1982. U.S. gasoline recently averaged $4.23 per gallon compared with $2.87 a year ago. Last fall, we saw fertilizer and supply chain issues. Corn break-even prices were $4 to $5 per bushel at the margin. Today, the second consecutive drought in South America is a fact and lost Russian and Ukrainian grain exports have removed a substantial portion of world supplies.”
2. RECOGNIZE BOTH RISK AND REWARD
“In the current environment, the range of possible outcomes is much wider than last fall when we started working on 2022 budgets,” Widmar adds. “It is exciting to focus on the upside sales price potential. But from these, in some cases, historic levels, there also is downside risk.”
As an example, he recalls it was just spring of 2020 when oil prices were negative and even in August 2020, the market was worried about oil falling below $3.
In this environment, Widmar advises considering many production scenarios in your budget to understand your possible outcomes.
“With crop insurance levels of $5.90 for corn and a record $14.33 for soybeans, you may be covering a higher percent of production expenses, but the dollars involved are higher. So your table stakes are bigger,” he says.
“After setting strong price floors [with crop insurance], look at market opportunities,” Erickson adds. When the market offers profits, take advantage of the opportunity.
3. CONTROL WHAT YOU CAN CONTROL
Understand what you are good at, Erickson adds. Use the resources around you. For instance, work with your financial adviser for personalized input and analysis. Or, if you can’t keep perspective in the markets, consult a marketing adviser.
4. REMAIN STRATEGIC
“Focus on your longer-term goals. If a decision helps you reach those goals, it is a good decision,” Widmar says. “Don’t chase an opportunity just because it is ‘a good deal.’ Size it up carefully and be fully aware of your exposure. Buying equipment or land means added costs for multiple years. Does it help you reach your goals, and will it be sustainable when commodity prices recede?”
Watch the yield curve, Erickson adds (see chart). The spread between two-year and 10-year treasuries has narrowed again, which can be an early sign of recession.
With a rising interest rate environment, there could still be a window of opportunity to lock in intermediate and long-term debt while there’s a flatter yield curve. You might consider maintaining higher liquidity to absorb market risk and prepare for opportunities that present themselves, he says.
