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Corn+Soybean Digest

Top 10 Ways To Manage Risk

It was a classic case of enough being too much. "I was tired of hearing about risk management from a salesman's viewpoint," says Perry, IA, farmer Ron Heck.

"Their idea of risk management was lowering theirs by convincing me to spend money on their products."

So Heck sat down at his computer, pulled up a spreadsheet and came up with his own list of risk concerns.

"It was easier than I thought it would be. In fairly short order, I had 10. I grouped them into categories and assigned dollar figures to them." He based his calculations on a 1,000-acre, central-Iowa corn-soybean farm.

Heck divided his Top 10 into three categories. Nuclear Risk: It's not likely to happen, but if it does, it's over. Operating Risk: Your management skills compared to those of other farmers. External Risk: Risks that you can't control by acting alone.

Under Nuclear Risks, Heck lists (1) Health, (2) Family and (3) Business Structure.

"You risk everything if you don't take care of your health. Simple things, like don't be stubborn battling 10 tons of metal and 200 hp. You'll lose," he says. "Know when to take breaks. Make sure everyone takes a break. Farming is stressful, so exercise. Buy catastrophic health insurance."

The cost of health risk management: $2/acre.

Heck suggests that you ask yourself several questions to decide if you're taking care of your family. Would your wife appreciate $2/acre spent just for her? Would you want your kids to live like you do? Does your family experience the fun of farming?

Do you violate the 3,000-500 hour rule? "It says, if you spend more than 3,000 hours farming and more than 500 hours doing volunteer work, your family life is probably suffering, whether you realize it or not," Heck says.

The cost of family risk management: Heck budgets $2/acre for his wife and $2/acre for a family vacation.

Structure your business vertically to reduce risk, Heck advises. A horizontal business structure takes control out of your hands.

"The less you control, the more you depend on everybody else to make a living for you," he says. "If you rent land; lease machinery; borrow your money; pay list price for inputs; hire most of your labor; rely solely on accountants, marketing advisors, crop consultants, etc.; hire trucks; rent a grain dryer; rent storage; and accept what the market gives you, how could you expect to stay in business? Get vertical."

He figures you need to spend $40/acre to cover at least part of these risks.

Under the category of Operating Risks, Heck lists (4) Agronomy, (5) Expenses and (6) Marketing.

"According to the Producer Profitability Program (PPP) sponsored by the Iowa Soybean Association, there's a $68/acre difference in yields between the top third and bottom third of the participants. The top producers spend less, but get higher yields," he says. "In the future, precision agriculture technology will boost income at least $30/acre. Combined, that's a $98/acre increase for no real cost other than paying closer attention to details."

There's not as much opportunity to manage risk on the cost side of the equation. Again, quotingthe Iowa PPP data, Heck points out that there's a $24/acre cost difference between the top and bottom third of the farmers in the program. Figuring $10 an acre for future "tech fees," He calculates you've got $34 an acre at risk that can be reduced through doing a better job of evaluating input vs. output costs.

Marketing risk involves a lot more than just selling crops, says Heck.

"You can make a permanent marketing mistake when you buy land. You have to be careful when you buy equipment, too."

There's not as much to be gained in marketing risk as in production risks, he adds. The PPP data shows that the difference between the top and bottom operators, in terms of marketing, was just $8/acre.

Heck cautions, "No one is smarter than the market. Remember that being wrong is a fact of life and you can't lower your risk by taking a large market position rather than making incremental sales. Make your living from agronomy, not trading."

The cost to doing a better job of marketing risk management is information access and keeping a level head, he says.

The External Risks on Heck's Top 10, those you can't control, include (7) Local, State and U.S. Governments, (8) World Governments, (9) Yield and (10) Price. Heck figures legislative changes pose a management risk of $48/acre for state and local, $153/acre for the U.S. government and $50/acre around the world.

"I think farmers need to be aware of how much is at stake with issues like taxes, transportation, energy, trade agreements and a long list of other concerns. They need to take lobbying efforts seriously. For a dime and some time you can affect issues that potentially could ruin your operation."

Yield failure due to weather isn't much of a risk issue if you use crop insurance, says Heck.

"Without it, you risk your whole year's production. It costs less than $10 an acre, and with the price gains of a short crop, the long-term cost of crop insurance is close to zero."

Last on Heck's list is price collapse. He figures that, with the marketing loan in place, low prices, for any reason, represent a $50/acre risk. But even with this year's prices, he admits that with his risk management approach to farming, he didn't lose much.

You can argue with Heck's numbers. They're not meant to be scientific. But it's hard to argue with the logic of a risk management program that puts health and family first, and follows with how to use a level head when making decisions for your farming operation.

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