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Corn+Soybean Digest

Manage Risk - Before It's Too Late

Risk management is a large umbrella that covers everything from environmental compliance to family issues, estate planning, even your management ability with employees.

That's in its broadest sense.

But 1998 proved once again that, unless you have the very basics of risk management in place - a marketing plan and some form of crop insurance - the other issues become secondary.

Weather took its toll through the Southwest, in parts of the Corn Belt and into the South last year. It devastated farmers who didn't have crop insurance protection.

Ironically, areas that didn't suffer drought, hail, wind or floods had excellent growing seasons that likely produced the largest U.S. soybean crop in history and the second-largest corn crop.

High yields coupled with a failing Asian market drove harvesttime prices well below profitable levels. Producers who sold ahead of harvest locked in some of the year's best prices.

The end of the year left many farmers wondering how they ended up in such bad shape financially. Before they figured that out, it was time to plan for the next crop.

How quickly things can change. There was a general sense of elation among farm communities in 1996 when the Federal Agriculture Improvement and Reform Act (FAIRA) was signed into law.

"The prospect of rising farm incomes, buoyed by expanding export markets, innovative technological developments and market-oriented farm and trade policies, seemed almost a sure bet a year or so ago," says Iowa State University economist Bob Jolly.

"Farmers understood that increased income volatility and lower safety nets would require that greater attention be paid to managing risk," he says.

It was easy to forget about risk management in 1997 when net cash income for America's farmers reached a record $60.7 billion. And those who did forget learned a painful lesson in 1998.

The euphoria of 1996, says Jolly, has been replaced with the gloom of 1998. It didn't have to happen. The tools for price and production protection are in place for farmers to use.

As the federal government has stepped back from its traditional role of safety-net provider, private business and universities have come forward with innovative products, services and useful information to help farmers create risk management plans. Farmers also are able to combine various marketing tools with a growing array of crop insurance options to gain better protection and greater per-acre returns. (For specifics, check the following stories and Risk Management Part II in our February issue.)

It's ironic, but the higher-than-expected yields that farmers harvested have some of them questioning whether they'll continue to carry crop insurance.

"I've had more than one comment that Crop Revenue Coverage insurance didn't kick in because of the higher yields. They're asking, 'If it doesn't work in a year with devastating prices, will it ever work?' " says Gary Bredensteiner, director of the Nebraska Farm Business Association.

"I'm encouraging growers not to kick it out. You never know what next year will bring. Most of them have crop insurance as a line item in their cash flows, and I hope they leave it there."

The profit picture changed dramatically for farmers from start to end of harvest.

"In mid-August we were estimating our farmers would lose an average of $27,000," says Bredensteiner. "By the end of November, however, it looked like we'd average a break-even year. Market recovery, LDPs (loan deficiency payments), additional government assistance and better yields all made a real difference."

For some, it won't be enough, he warns.

"We have some producers who will still lose up to $200,000," he says. "I'd estimate that 10% of our clients will consider throwing in the towel or be forced to throw in the towel because they won't be able to get financing."

Last year's disaster doesn't mark a return to the farm crisis of the 1980s, ag economists agree. In comparison, interest rates now are in the single digits rather than the 20+% rates farmers faced in the 1980s. Land values are also strong and stable and debt loads are lower.

Total farm debt stood close to $166 billion at the end of 1997. After this past year's problems, total debt is projected to increase to $172 billion. That's well below the $200-billion debt mark that farmers nearly reached in 1984. In addition, growers have built their balance sheets with profits and retained earnings, not asset inflation.

A tough 1998 will have farmers taking a harder look at marketing in 1999, Bredensteiner believes.

"I hope we have more people paying attention to their cost of production and taking advantage of market opportunities," he says. "And there will be opportunities."

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