Managing risk key to farming in 2009

In many cases during 2008, farmers planted a crop not knowing how much it would cost to grow the crop, but banking on high commodity prices to put profit on the bottom line. Farmers who survived that strategy in 2008 will likely find times harder in 2009.

There is no doubt 2008 was a good year for most farmers. Net income likely will top $95 billon — a 10 percent increase over 2007.

Profits from the 2008 crop seem to indicate an ideal time to buy new equipment, land or other assets. However, risk for the 2009 crops may make building working capital and saving money for harder times a better option, according to former Virginia Tech Ag Economist Dave Kohl.

Speaking at a recent Southeast Agriculture Lending School (SEAL) conference at Clemson University, Kohl said, “Farmers make their worst management decisions during good times.” Kohl says farmers should build cash reserves and working capital at this time.

Agricultural lending has been impacted less by the current financial situation than other segments of the economy. However, lending to large farming operations will likely be more restricted for the 2009 growing season. Anticipating more restrictive lending policies is a good reason for growers to build cash reserves and working capital, according to Kohl.

In the Southeast, the cost of producing a crop has nearly tripled for grain production and more than doubled for traditional crops like cotton and peanuts. Not only do farmers have to deal with their own financial solvency, they likewise must take a careful look at their input suppliers. Kohl says. “ Prepaying for inputs at record high prices, months in advance, is a tough decision to make. Farmers now must worry about the liquidity and solvency of their input suppliers.”

Some factors to consider when planning to manage risk, Kohl says:

  • When prepaying inputs, hedge by making future crop sales with one of the marketing tools available. If possible, spread risk by buying inputs in increments so, if prices decline, you're not wrong on the whole amount purchased.

  • Know who you are doing business with. When prepaying, ask your suppliers for financial statements.

  • Utilize revenue-based crop insurance. Buy up to cover higher production costs.

  • Build working capital to meet current and future obligations and to take advantage of opportunities as they arise.

In some parts of the country, pest management companies are offering reduced crop insurance for growers using technology traits that improve the odds of making a profitable crop. For example, corn producers in 11 Midwest states will benefit from using Monsanto's corn hybrids that include in the seed the company's YieldGard Plus, YieldGard VT Triple and YieldGard VT Triple Pro corn.

The Federal Crop Insurance Corporation (FCIC) Board of Directors of the United States Department of Agriculture (USDA) recently approved the expansion of a Risk Management Biotechnology Endorsement for the 2009 crop year.

Taking optimum advantage of crop protection opportunities in periods of unprecedented high risk is a must for farmers in 2009.

In 2008 seed supplies in some regions was spotty, though in general soybean, corn and wheat farmers got enough seed to plant as many acres as they wanted. However, they didn't always get the varieties they needed to provide the best fit for their soil and growing conditions. Most experts agree the first step in managing risk is to put the right seed in the ground.

Soybean and corn seed supplies should be good in 2009, better across the board than 2008, according to Bruce Howison, vice-president for marketing for corn and soybeans for Syngenta Seeds.

Most grain seed are grown and sold regionally. The problems with growers getting the seed variety they wanted in 2008 in the Southeast will be less of a problem because companies, like Syngenta, have geared up better for the demand for corn and soybean seed in the region, Howison says.

In the future, probably even to some extent in 2009, growers will be looking at varieties that will produce optimum yields based on fertilizer and pesticide needs rather than simply high yield potential, he adds.

Efficiency will be critical to managing risk in 2009, regardless of the crop grown. High yields will also be critical in 2009.

North Carolina vegetable and sweet potato grower, Kendall Hill is a third generation sweet potato farmer in Kinston, N.C. Never before in the history of Tull Hill Farms has efficiency been so critical to survival, he says.

“It's going to be tough for a cotton farmer to make a go of it, unless he can produce at much higher levels than the state average — same with sweet potatoes, tobacco and vegetable crops,” Hill adds.

In 2009, seed supply appears to be less of a problem, though farmers are placing seed orders earlier than at any time in recent years. Though supply is not so much of a question as in 2008, price is a much bigger problem.

Seed corn prices for 2009 may climb close to $300 per bag in some of the Southeastern states, especially in some of the more popular high-end triple stack varieties. The argument for higher prices is that the pest management capabilities of genetically improved varieties lower the overall cost of production by eliminating or reducing the need for certain pesticides.

A veteran Southeastern corn grower countered that contention at a recent corporate-sponsored event by saying, “Technology does not yield anything,” he said. “It merely protects the potential for yield which is supplied by the genetics. “If corn does not have a yield potential of 200 bushels an acre, you can apply all the technology you want and it won't yield more than 200 bushels an acre.”

There is no doubt the cost of producing a crop will jump dramatically from 2008 to 2009. A recent survey by the University of Illinois predicts the cost of getting a crop in the ground in 2009 may jump by 30-35 percent. Along with input price jumps comes increased risk.

The study projects non-land production costs for corn will total $529 an acre next year, up 36 percent from 2008 and nearly 85 percent higher than the average of $286 per acre from 2003 to 2007.

At $321 an acre, soybean input costs are projected to rise 34 percent from 2008 and more than 78 percent from the 2003-2007 average of $180 an acre.

Assuming cash-rent fees of $200 an acre, the study projects a break-even price of $3.82 a bushel for corn in central Illinois, based on an average yield of 191 bushels an acre. Soybeans would break even at $9.65 a bushel, based on yields of 54 bushels per acre.

The cost of growing the crop is not the only risk a farmer will have in 2009. Speaking at the recent 71st annual meeting of the North Carolina Feed Industry Association, Randy Gordon says the CME (Chicago Mercantile Exchange) which now owns the Chicago Board of Trade admits the wheat futures contract is broken. Corn and soybean futures are similarly affected by the current financial crisis.

Gordon, who is vice-president of communications and government affairs for the National Grain and Feed Association, says the same trends are beginning to be seen in corn and many wonder whether soybeans will be next.

Gordon says elevators managers and feed mills have lost confidence in futures market as a risk management tool.

Down to the farmer level there is little confidence that futures prices are a true barometer of what supply and demand conditions are for crop and commodity values, Gordon says. “Losing the ability to forward contract crops significantly increases what is already a huge risk in farming.”

Darlington, S.C., grower Gil Rogers probably put 2009 risk in the proper perspective. He says, “We've just harvested our 39th crop. In the past having a real good crop would get you through two or three years of bad crops. Now, I don't think that will work.”

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