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Managing risk in 2020

The best way to plan for volatility in all aspects of agriculture is through risk management. Here’s a look and how to manage risk in these key industries.

2 Min Read
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CROPS

This year, expect to see markets wrestling with the familiar headlines: strong supply, trade uncertainty, ethanol and unforeseen weather events that may arise. Those uncertainties along with the 2020 election will pave the way for another volatile year in the grain markets.

Growers need to develop and execute a solid risk management plan. That plan should include crop insurance for managing the operation's risk, a pricing plan to lock in prices for grain when the market presents opportunities and a financial plan that includes a breakeven analysis and cash flow.

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Uncertainty brings many challenges but the more prepared an operation is, the more successfully they will manage through the challenges they face.


 
DAIRY

Dairy farmers are looking at 2020 as an opportunity to recover and rebuild financial position. Fortunately, the milk price outlook for 2020 is favorable as production in the U.S. and across the world is expected to grow slowly. Demand for dairy products such as cheese, butter and milk powders continues to be solid.

In 2020, dairy farmers should focus on these key areas: 

  • Take steps to hedge or insure the profit opportunity offered by the futures markets right now. Market uncertainties could cause downward price movement in the future. 

  • Use profits to pay down account payables, operating and cow lines to rebuild working capital. 

  • Revisit the farm's long term plan to prioritize capital investments. 

  • Continue the focus on efficiency and productivity to enhance long term competitiveness. 

  • Engage with your milk processor to help align milk components, quality and logistics to gain the highest value for both the farm and the processor. 

SWINE

The pork industry is likely to have solid demand for product in 2020. Domestic demand for pork remains relatively strong, led by solid bacon demand followed by U.S. demand for pork butt. Pork exports increased in the latter half of 2019 with rapid growth in product going to China. U.S. pork production has also been growing.

While expectations for demand are strong for the year, price volatility will continue. Record levels of meat production in this country will require product exports to maintain profitable margins. Packer margins continue to be near record levels with hog production increasing by 4% in 2019 (through November) and processing capacity being reached. All these factors are causing basis to be wider than normal, causing additional risk-management and price issues.

Many producers are in a position where they need a profitable year in 2020 to rebuild working capital and lost equity from prior years. Start that analysis with an understanding of how well your 2019 strategy was executed. Have clear communication internally and with advisors about how to evolve risk management strategy to protect profitability this year.
 
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