Risk management isn’t all about crop pricing and stock markets. There are lots of ways to manage many different types of risk
Spring is approaching and with it comes the anticipation of a hectic and sometimes stressful time of year: seeding!
I want to take some time to talk about other aspects of farm risk management that you can deal with now that can and will save you time and money come the busy time of spring seeding.
Risk management can mean a lot of different things:
- Locking in input supplies like fuel, fertilizer, chemicals or feed stocks to reduce your operating expenses.
- Upgrading equipment to improve efficiencies and save time and money.
- Hiring out aspects of your operation to reduce overhead or shift liability.
- Locking in a price on grain to ensure a profit.
All of these things are done with to make sure that, at the end of the day your farming operation is profitable.
Prices for inputs like fertilizer vary greatly from year to year depending on many factors, such as supply availability and demand come spring. When we hear that manufactures are idling back production facilities because they have excess inventory, we would expect prices to drop. That’s when you want to be ready to take advantage and pre-purchase.
With mergers and closures over the past few years there are fewer production facilities owned by fewer companies and manufactures are becoming very adept at tightening inventories at strategic times of the year to ensure a viable market for their products.
When I hear there are concerns about low water on the Mississippi it raises a flag for me because a good portion of the total tonnes of fertilizer brought into the U.S. and distributed throughout North America come up the Mississippi. If barges are load restricted or can’t run on the river due to low water, you are going to see supply shortages and price hikes.
If retailers are not carrying a good supply of product heading into spring you can expect prices to increase. You’re going to be competing for supplies in a very compressed time frame as everyone is going to need their fertilizer in a six-week period to get their crops seeded. If there are any supply problems during that time, prices can escalate quickly.
Rising fertilizer costs represent a huge risk to your operation. Your long-term strategy needs to include ways to manage or minimize this risk.
Pre-purchasing fertilizer now may be a good strategy for you.
The right answer depends on your operation and your ability to store fertilizer until spring. If you need the fertilizer delivered and you’re relying on your retailer to do that, you may run into some logistics problems whey they’re busy in the spring. In some cases, storing fertilizer on-farm could save you a lot of time and money.
The question here is “Do you have the right kinds of bins to store fertilizer on your farm?” If not, should you be planning to add storage capacity? What is the cost? What are the costs and risks of not doing this?
The next step to manage your fertilizer price risks is to consider using fertilizer futures contracts to hedge your risk if you can’t pay for it or store it.
Much of the discussion about fertilizer also applies to fuel. No doubt you’ll need a few gallons of diesel to get you through seeding. Some retailers allow you to pre-pay for fuel that they store or deliver at a later date but most of the time if you want to lock in a good price you have to pay for it and take it home.
If you have limited storage at home and there is a spring supply shortage, what does that cost? Would expanding on-farm fuel storage save you money or time in the long run?
Do you use fuel futures contracts to hedge your price risk?
These are also decisions that need to be a part of the long-term growth plan for your farming operation.
Buying equipment to improve efficiencies and save time and money is another risk management strategy that needs to be a part of a long-term business plan as it requires considerable capital.
Or, rather than buying equipment, do you look at hiring out some work to reduce capital costs or shift liability? Crop spraying is one job that many hire out in today’s farming world. Does it make sense for your operation? The timing of crop spraying is very critical to the success of your farming operation. Can you afford to take on timing risks to save some capital dollars purchasing your own equipment? Do you have the manpower and expertise to do it yourself if you buy the equipment? What makes the most sense for your operation?
As your farm grows, do you have enough work all year to hire a full time employee or even two? This can be a very big step forward in taking your farm operation to the next level. But once you do that, your job suddenly changes from doing the work to managing operations and still doing some of the work! Are you ready to do that? Are you capable?
It all comes down to risk and how you try to reduce or manage each particular risk.
All of these variables and options need to be looked at carefully every year. There will be good years and bad years that could dramatically alter your ability to accomplish your plan as you have it figured today.
Good decisions can be made when you understand your risks and know your options for mitigating those risks. †