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How to hedge during a farm transition

Ag Marketing IQ: Use a worst-case marketing scenario to lay a strong foundation for the next generation.

Matt Buckingham, Risk management advisor

March 12, 2024

3 Min Read
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A good definition of marketing is the process of securing revenue. Our ability to secure revenue is extremely important, especially during times when we have big events – such as farm transition – that make us slightly more vulnerable.

Farm transitions add a layer of complexity and it’s important that our business has the correct marketing approach when major changes occur. From my experience, I can tell you that during a farm transition, lawyers can and will throw a curve ball at you. This is especially true when multiple people are involved, and most farms today are growing in size and people.

One legal curve ball, for example, is if the business isn’t prepared for the next generation to take over operations, the legal influencer could see operating the farm as a liability. He or she may then freeze the equipment and potentially other assets. If the farm cannot operate with its own equipment, it could result in needing to rely on harvest crews.

Consider long-term marketing moves

One solution to this situation is having a hedge account to avoid a grain contract. It can also be beneficial for marketing grain several years in advance, especially if the next person in line is uncertain about the land or a deal's likelihood of completion. Marketing needs to be a priority during these times and your balance sheet needs to be protected.

Related:How to transition farm machinery and equipment

During a transition, it is best to assemble as many known facts as possible. Specific to marketing, being able to look over the worst-case scenarios can be important when adding debt or leverage to the portfolio. A well-known quote is that “markets can remain irrational longer than we can remain solvent.”

This is why we plan for the worst and hope for the best in marketing. It means having flexibility to protect the downside to markets and the ability to cheer for higher prices.

Getting started on a solid foundation is critical. Many producers who are just getting started are in a very tight spot currently. For example, say the next generation was renting 300 acres and made $100 an acre last year. Then dad decides to give the son or daughter another 300 acres and they have 600 acres to farm this spring. If they lose $50 an acre, that’s all it takes to give back everything they made the previous year.

Scaling up and growing can be very impactful in both positive and negative ways. Having a sound marketing plan and managing market risk is critical for the times when we are most vulnerable.

Acknowledge and embrace volatility, then direct your path towards success.

Related:Use off-farm investments to reduce your farm income tax burden

Contact Advance Trading at (800) 747-9021 or go to www.advance-trading.com.

Information provided may include opinions of the author and is subject to the following disclosures:

The risk of trading futures and options can be substantial. All information, publications, and material used and distributed by Advance Trading Inc. shall be construed as a solicitation. ATI does not maintain an independent research department as defined in CFTC Regulation 1.71. Information obtained from third-party sources is believed to be reliable, but its accuracy is not guaranteed by Advance Trading Inc. Past performance is not necessarily indicative of future results.

The opinions of the author are not necessarily those of Farm Futures or Farm Progress.

Read more about:

Farm Transition

About the Author

Matt Buckingham

Risk management advisor, Advance Trading, Inc.

Matt is native to West Concord, Minnesota. After earning a degree from South Dakota State University while minoring in Ag Science with Ag Marketing and Ag Business, Matt worked for Farmers Cooperative Elevator Co. as a grain originator for 7 separate elevators and various processing plants. Matt is now using his education and experience to serve clients across the state of Minnesota pursuing his passion to help farmers manage risk.

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