Volatility makes risk management critical

Change was the watchword of the political season, but volatility may be the best description of agriculture, says Nueces County, Texas, farmer Jimmy Dodson.

And that volatility may alter the way farmers look at risk.

“We now have to do just as good a job managing risks as we do in managing yields,” says Dodson. “Our risk profile has changed and volatility (in both production costs and commodity prices) is a bigger factor.”

The volatility in markets has even disrupted risk planning for professionals, he says. “Strategies that have worked in the past have not worked recently, and may be less reliable in the future. Historic high basis levels caused grain prices received on hedge-to-arrive contracts to be more than a dollar a bushel less than expected.

“Recent corrections in fuel and fertilizer prices may have ruined the plans of producers who filled tanks in the early fall. Professional marketers have been challenged to adjust plans in this environment, and mistakes can be substantial. We have to be more agile with marketing programs,” Dodson says.

He typically uses two or three marketing pools to sell his cotton crop, a strategy that works well when prices are lower and equities are being traded. “The diversification of having multiple managers has worked well, since performance varies.

“Crop insurance is essential for my risk management,” Dodson says. “Insurance choices have widened with more products available and new crop planting options.”

He uses consultants to help with decision-making. “I use an ag consultant to advise on chemicals, harvest aids, and plant growth regulator applications. I use another service for corn and grain sorghum marketing decisions.”

He says a co-op lender also plays a role. “Farm Credit was designed for a time like this when credit was scarce. They know agriculture and their expertise keeps them engaged and adds value to my business. Co-op lenders also share earnings and that cuts my cost of financing.”

He says farmers who own storage and processing facilities face new risks caused by crop shifts and credit stress. “Last year we merged our co-op cotton gin with another cooperative that included a gin and a grain business. That helps spread those risks and helps secure adequate infrastructure in stressful times. We are looking at ways to hedge fuel and fertilizer. We’re using options to try to cap fuel prices during the current downturn.”

Dodson says technology helps farmers. “With our RTK guidance system we can work 24 hours a day if we need to get in front of a hurricane or rain event. (Nueces County is near the South Texas coast.) In the past, we couldn’t do that. Whether it’s harvest, planting, or land-prep, this expanded capacity and thru-put is valuable.”

Dodson says biotechnology and other seed technology has been beneficial in managing pests, reducing chemical sprays, and in many cases improving yields, but even this important tool has some unexpected effects.

“Since the cost of the technology is locked in at planting, this incurs a fixed investment in technology compared to older conventional sprays which can be used more selectively. Technology companies have recognized this by providing drought and disaster programs to reduce seed and tech fees when yields are impacted by bad weather. Without these programs, dry-land producers would be hard pressed to keep planting cotton at these low prices.”

Dodson says farmers may begin to see equity problems as production costs rise and commodity prices fall or remain stagnant. “Cost escalation dilutes equity,” he says. “It takes more dollars to farm the same land and we use the same old equity to cover this investment.”

He says a farmer could become as vulnerable as if he’d stretched himself too thin with land or equipment acquisition. “And all he did was show up for work farming the same land. It just costs more to manage it, and his leverage ratio is higher.”

That scenario, Dodson says, “could reduce a producer’s ability to expand or replace equipment.”

He’s concerned about the farm program, too. “Even though we worked hard to preserve it against long odds, we have less of a government safety net. It’s still there, but budget stresses may take all the spring out of it.”

He says a lot of farmers in the United States are nearing retirement age. “Farmers my age (55) need an exit strategy. If we decide to sell out and retire, who will buy us out? The challenge for the next five to 10 years for a lot of farmers is figuring out how and when to retire. And the farm is the retirement plan for most of us.”

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TAGS: Management
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