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Building a crop risk management strategy

A crop risk management strategy is your plan to protect your farm from unexpected loss

What is a crop risk management strategy? It’s a fancy name for what do you do on your farm to protect yourself from production and/or revenue loss.

What do you use as part of a CRMS? Crop insurance, AgriStability, hail insurance, Global Ag Risk Solutions (revenue protection insurance), Just Solutions (business interruption insurance), or maybe you self-insure.

As of this past summer, I am no longer an Advisor for Global Ag Risk Solutions so this is not a sales pitch for their revenue insurance program. My independent, unbiased opinion is that each of these programs have merit and are a potential fit on your farm depending on a number of factors that can only be determined by looking at your farm’s specific situation.

Do you need a CRMS?

Yes. It ties into your overall farm management plan in a few different ways.

It helps to limit your farm’s potential loss liability to a level that won’t negatively impact your farm if the worse should happen. This will ensure that you are farming again next year.

Individual crop coverage levels will change from year to year. Reviewing and making a CRMS may show you that your net profitability per acre between crops is very similar yet one crop has a better coverage level or cheaper premium. In that case, you may want to consider shifting some acres if it works within your crop rotation plans.

A CRMS helps you maximize production capabilities, and make better agronomic and weather-related decisions. For example, if you buy GARS coverage, every dollar you spend on inputs (seed, fertilizer, chemical) is protected under their revenue insurance policy. All you need to decide is whether your crop will benefit from an extra in-crop application of fertilizer, herbicide, pesticide or fungicide. You don’t need to worry about what the weather might do, you know that the cost of those inputs will be covered under your GARS policy.

Having a CRMS can be very useful when you are talking to your bank about extending lines of credit or financing new purchases. If you can show your banker how you have protected your production or revenue for the coming year, they will feel better about extending credit to you to grow your business. That could even result in lower borrowing costs, if their risk of lending to you is lower because of your CRMS.

Your CRMS can make a difference in how you build and execute your grain marketing plan. A GARS revenue protection policy gives you contract buyback protection, or what I like to call “delivery risk protection.” This will enable you to be a little more aggressive on your pre-harvest marketing strategy.

Marketing and your CRMS

Having your CRMS in place is key to building the best marketing plan for your farm.

If you only use crop and hail insurance you may not be as aggressive with your marketing plan in the area of pre-pricing, because of the contract buyback risk you would face if you don’t produce enough tonnes. You can use a futures hedge or an options strategy to counter that risk, but those come with a cost.

If GARS coverage makes sense for your farm while also providing contract buyback protection at no extra cost, incorporate it into your marketing strategy. This will allow you to pre-price more grain with little or no delivery risk, improving your cash flow when it is needed to pay bills.

Determining which of these options, either alone or combined, will work best for your farm is not an easy or quick task to complete. Building a plan that gives you the best protection depends on a number of factors such as the financial health and key indicators of your farm. Where are you in your farm’s lifecycle? Early into a new transition, growth mode, established, transitioning, or ready to sell and retire?

These and a number of other factors must be considered to build the best or most cost effective CRMS for your farm.

A CRMS is a key piece of your overall farm Business Management plan that will help you better understand the risks you face and how to manage them so they become opportunities instead of threats. This will result in better overall profitability for your farm.

If you would like more information about building your own CRMS, I just happen to offer independent, unbiased one-on-one service.

About the author

Columnist

Brian Wittal has 30 years of grain industry experience and currently offers market planning and marketing advice to farmers through his company Pro Com Marketing Ltd.

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