Farm Progress

Volatility and Risk Management Practices for Producers and LendersVolatility and Risk Management Practices for Producers and Lenders

David Kohl

April 1, 2008

1 Min Read

For producers, a home run hitter without a marketing plan gets the bragging rights at the coffee shop this year. In the long run, developing budgets with a range of probabilities, scenarios and outcomes given known costs and breakevens is very critical for long-term success. Having a diversified marketing and risk management plan that mitigates risk in a worst-case scenario and positions the business to capture profits during a favorable part of the cycle is critical. Producers need to be very careful not to lock themselves into fixed and variable costs, such as high rents, just in case the market crashes.

To lenders, the answer is getting back to basics. That is, requiring cash flows and profit analysis, a marketing plan that is executed and working capital reserves on the balance sheet to protect against financial adversity. Lenders need to be particularly conservative regarding the maximum amount loaned on land and other assets. Some lenders are dropping the limit from 80-85% of value to 60-65%.

Editor’s note: Dave Kohl, The Corn And Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected]

About the Author(s)

David Kohl

Contributing Writer, Corn+Soybean Digest

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