- Focus on the use of public (futures markets) and private (crop insurance) risk management tools to manage farm revenue risk.
- Investigates policy-important areas of federal crop insurance, fertilizer decisions, and environmental quality.
- President of a family-owned grain farm Montana producing wheat, canola, barley, and peas.
- All 7 Best Practices
- Pre-Call Discovery Process
- One-on-One Call with Expert
- Session Summary Report
- Post-Session Engagement
Agriculture Insurance, Futures and Options for Optimal Farmer Decision Making
Few businesses can be as uncertain, or as risky, as farming.
Weather, ranging from hail storms to extended drought, can destroy your production capability. Government decisions, and even farmer decisions, on the other side of the world can determine the prices you receive. On any given day farmers face cost pressures, price pressures and revenue risk.
Strategies to minimize uncertainty and risk are available. But they must be applied in a way that is keyed to conditions on each individual farm, and even for each crop on a farm. One size does not fit all in risk mitigation. Producers need to model their operations in spreadsheets or other software so that decisions can be evaluated on their overall impact on revenue and not just on prices received, for example.
It is important not to confuse risk with uncertainty. Uncertainty reflects the level of unknowns in your business. But risk is specific to something bad in your business environment. It is possible, as an example, to work on lowering your uncertainty – say by reducing price uncertainty with forward contracting – while potentially increasing your risk of failure if you cannot meet those contracts later because of low yields.
Striking a balance between uncertainty and risk is challenging, but achievable:
- Producers must understand both their financial and agronomic risks, which are unique to each production unit. Farmers also need to understand how global markets work in the commodities they produce. Supplies, demand and volatility all come into play.
- Flexibility is essential. A strategy for a given year may not work as well under conditions of a different year. Over time, conditions can change, requiring a different sort of flexibility. A working strategy to protect crop prices in any given year, for instance, won't protect revenues from slow declines because of extended drought or other problems.
- Producers must be alert to changing economic and market conditions over time. The recent emergence of exchange-traded funds, in which investors can buy the equivalent of stock in a commodity, has introduced a new level of speculation and volatility into commodity markets. Producers need to be sure they are changing their perspectives and knowledge and must be willing to learn new skills for managing risk.
- One key tool available to producers to lower their risk is federally subsidized crop insurance. Such insurance needs to be at the center of risk strategies because it is an inexpensive way to protect actual farm revenue. Crop insurance is calculated to be actuarially fair, which would be a break-even proposition over time. But because the premiums are subsidized, you are going to get more money back over time than you have put in.
- Insurance choices also need to be balanced against other strategies, like forward contracting to lock in prices on a portion of your expected harvest. It is essential to insure your crop at a level that can protect you against the risk of selling a crop you have yet to produce.