Broadening Challenges Make Risk Management More Difficult

Evolving to meet the challenges of volatility, global risks and pricing uncertainty

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Market volatility and pricing uncertainty have been agricultural producers’ constant companions for decades. Yet the speed at which markets move and the sheer number of factors influencing commodity prices have grown dramatically. Moreover, agricultural markets have become more global, adding additional complexity to simple seasonal supply and demand fundamentals. These broadening challenges are here to stay, making proper risk management even more difficult.

Agricultural markets have become more global, adding additional complexity to simple seasonal supply and demand fundamentals.

As operations become larger and more complex, producers will have less time to manage the marketing practices of their operations. More and more operators are looking for consulting relationships to help manage their risk and provide the support they trust so they can focus on what they do best – production ag. Additionally, producers will expect their consultants to help bring all the data together — costs, sales, break-evens, production, profitability goals and tax considerations. This across-the-board assessment is critical for providing sound risk-management plans.

What can producers do and plan for?

Data and technology will be key in marketing and risk management strategies. One of the most important criteria for making marketing decisions is knowing profitability. Identifying costs of production, break-evens and production estimates are primary drivers in a good marketing plan. The producer who markets without a good handle on this type of data is more likely to make risk management decisions “reactively” based on emotion, and less likely to make “proactive” decisions based on profitability, which is the real goal of good risk management.

The bottom line is that complexity and volatility will remain part of the agricultural picture. Producers tend to desire simplicity when it comes to how they market. They often fall back on traditional marketing methods, regardless of evolving markets that make those methods less effective. The future requires a different approach.

Understanding risk factors, mitigating their impacts, and pursuing opportunities and solutions will be essential for succeeding amid ever-changing markets. For a deeper dive, click here to read our full Ag Outlook.

10 steps to build a strong risk management program

1. Take an honest, personal assessment of your knowledge and skill of marketing tools.

2. Value the data of your operation. Invest in technology needed to gather this data.

3. Find a mentor that you trust. Look for a fiduciary, not transactional relationship.

4. Establish profitability goals in advance.

5. Know your risk comfort level.

6. Identify market risks and develop hedging strategies in advance.

7. Review strategies periodically and refine if needed.

8. Plan for cash-flow needs in marketing decisions.

9. Invest in ways to control inventory, such as on-farm storage.

10. Leverage crop and livestock insurance in your risk management decisions.

Contact a KCoe advisor to help with grain or livestock ag marketing strategies and risk management plans.

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