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Risk management—a whole new world

The time to worry about price risk management is when you have an opportunity to do something about it — not after the fact when you are saying, “Why didn’t I sell some?”

When we think of risk management in farming, one of the first areas that comes to mind is marketing. This year, however, weather brought in a factor so significant that most of us never dreamed of the impact. Floods throughout the South and the eastern Corn Belt have derailed planting of corn, cotton and soybeans.

Those with high level revenue insurance will still likely come out “okay,” but it is never the same as having a good crop at good prices. Insurance for the most part is designed to keep a producer in business — not make him money.

So, with many sleepless nights over the last month and a half, the majority of the crop is either now planted or producers have opted to collect payments on prevented planting policies. In either case, what is done is done and now we must all move forward and look at what risk management programs are most important from now until harvest.

If you collected PP, all you need to do is control your weeds the rest of the summer, spend time with the kids and grandkids and possibly do a little fishing and hunting.

If you were fortunate enough to get a crop in the ground, now you hope that Mother Nature does not “balance out,” which would bring on a drought for the rest of the year so that rainfall would be “average.” From now on, no one wants average rainfall for the year.

High volatility

What this has resulted in is extremely high volatility, which also plays with risk management programs in grains. Not only do farmers not want to use futures and options because of the price and volatility, but local grain elevators are strapped, too, just like in 2008. Many are against their credit limits, forcing them to pass on grain sales at a small margin to the much larger grain companies. This limits the risk management programs for many producers.

On the other hand, some will say, “Who needs a risk management program when corn is $7 per bushel, soybeans are near $14 and cotton is $1.30 per pound?” Those are the exact reasons why one needs a risk management program now! These prices in the long run will not hold.

Big bull markets are always followed by big bear markets and this one is not going to be any different. Too many times we have all looked at high prices of grain and thought, “This will go on forever.” It never does!

The time to worry about price risk management is when you have an opportunity to do something about it — not after the fact when you are saying, “Why didn’t I sell some?” Locking in $14 beans, $7 corn and $1.30 cotton will guarantee a good year for any producer who has a crop.

Therein lies the big question — who will have a crop?

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