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Production, profitability and protection

The paper side of farming: A successful farm needs to turn a profit every year

Over the past few months we have seen a number of events unfold around the world that have sent grain markets tumbling, some to four-year lows. Devaluation of the Chinese Yuan, and subsequent sell off in the Chinese stock markets, 10-year lows in oil prices and a six-year low for the Canadian dollar.

Overall, across the Prairies yields are estimated to be below average this year due to dryness, which means that the only real hope of achieving profitability on your farm this year is to capture a higher dollar value per bushel for the volume that you do grow.

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Needless to say this recent downturn in the grain markets is not a welcomed or profitable event in anyone’s opinion other than maybe the end use buyers of grains.

With the weather uncertainties starting this spring, most producers have been reluctant to do much if any pre-pricing earlier in the year due to the fear of not being able to deliver and having to buy back contracts.

As harvest progresses and the markets continue to struggle I am trying to figure out how producers can better protect themselves and ensure a profitable outcome on their farm every year. Or is this a pipe dream?

Long-term solutions

As a grain marketing advisor my first instinct is to try to get producers to be more aggressive marketers, locking in profitable prices when they are available on a larger percentage of their crops each year, and convince producers that the reward of having locked in profitable prices outweighs the risk of contract buy backs. But does it? If you are overly aggressive one year and get caught it could have devastating consequences for your farm business for a long time if you don’t protect yourself.

Next I put on my insurance broker advisor’s hat to see if there is a better way for producers to insure their profitability. I see some potential worth exploring within the current provincial crop insurance programs that exist and the revenue insurance program offered by Global Ag Risk Solutions.

Over this past winter season I spent many days as an advisor for Global Ag Risk Solutions, in discussions with hundreds of producers about the difference between production insurance and revenue insurance. I reviewed their farm business plan, cost of production and break even numbers to help them make better decisions about what type(s) and how much insurance they should carry.

One thing is for sure, no two situations are the same. Parents, children, siblings and neighbours all have different plans, needs and expectations that make each situation unique. To insure your farm business adequately you need to review your plan and numbers thoroughly. Your costs of production, breakeven analysis, land and equipment cost and debt servicing are all critical factors in determining how much insurance you should be carrying.

Bottom line: for your farm business to be successful you need to profitable each and every year. But what level of profitability is acceptable for your operation? One dollar per year, or one million dollars per year?

The risks

What level of risk are you prepared to take on and what cost are you willing to pay to reduce your overall risk?

Marketing risk: How much are you prepared to pre-price when prices are profitable? There is the risk of having to deliver, and/or having to buyout the contract if you don’t get a crop. You can use futures or options to protect yourself on some crops (wheat, canola) but there is a cost to that. Are you willing to pay it?

Production risk: What level of insurance coverage should you be taking? I refer back to my earlier comment: no two farm operations are the same. The coverage you choose will be based off of a number of factors that only you can choose and evaluate. For example if your “all in” costs of production are $300/acre and your anticipated gross revenues are $425/acre, at what level do you insure yourself? The answer is somewhere in between those two numbers.

Should you use production insurance or hail insurance or revenue insurance or a combination of all three?

Production insurance covers you until your harvest is complete. If you use the Spring Price Endorsement for price protection it is only valid until the end of October. After that you are in the markets on your own with any grains you have not priced.

Revenue insurance covers you for either production or price loss that puts you below your insured revenue threshold. That insurance stays in effect until May of the next year, providing you with an additional six months of revenue protection should markets fall lower after harvest.

What do you want your insurance to cover on your farm?

You could take production insurance and have an average crop that would not trigger a claim, and still not show a profit for the year if prices collapse after harvest.

With revenue insurance you insure yourself at a fixed dollar per acre of revenue averaged across your total farm. Then, if either production, quality or price fall to the point where your per acre return is below your insured value you will receive a payment. In essence you are putting a revenue insurance floor in place for your farm that covers you for the entire year from May to May.

Revenue insurance is not designed to guarantee you a profit. It is designed to help you cover your costs of production so that in a worse case scenario your costs of production are covered so that you can farm again next year without a big financial hit.

However, now with new enhanced rates of coverage, depending on your farm’s situation and financial history you could qualify for insurance coverage that exceeds your cost of production, so in essence you would be insuring yourself for a profit.

For those wishing to enhance their coverage to match anticipated gross revenues, you can also use production and hail insurance to provide additional coverage.

In conclusion, using insurance, farmers can almost guarantee themselves a profit every year, but it requires some time to understand these insurance products and how they may work on your farm.

It’s never too early to start planning for the future!

If you have any questions send me an email at [email protected] or phone me at 403-586-0077.

About the author

Columnist

Brian Wittal

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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