Surprise! There is risk in farming again

I had a conversation with a farmer a few years back, and he told me that there were a lot of years that he hated to go to town because he was embarrassed at how broke he was. Time went on and his financial position improved, as it did for a lot of farmers, and he told me that now he was embarrassed to go to town because of how much money he was making!

Times change, and agriculture, like any industry, has its ups and downs and carries risk. Over the past five years, production agriculture has seen profitability like no other time in history. This has created a great opportunity for producers to “heal up” or improve their financial position. Because of this change in financial position, producers may need to approach their risk management differently than in the past as their risk bearing ability has likely changed.

For grain producers, it appears that the base price for Multi-Peril Crop Insurance (MPCI) will be set at about $4.62 for corn and $11.36 for soybeans. This is nearly a 19% drop for corn and 12% for soybeans compared to 2013 prices. Despite the drop in commodity price, the majority of your input expenses have not seen the same reduction. For a producer with an APH of 125 on corn, this is a reduction of nearly $100 per acre in the guarantee and is likely not enough to even cover the direct expenses. Does this mean the sky is falling? Absolutely not, it simply means you need to identify your risk and approach managing it differently than in the past.

Please do not simply make the assumption that you should just keep your MPCI the same as you have had it in the past, you NEED to review your policy and your guarantees. Though it likely comes with an increase in premium, some producers may need to consider increasing their coverage level or changing unit structure or plan to offer them the guarantee they or their lender may require. In contrast, other producers may have the opportunity to change or lower coverage based on their needs. Needless to say, you have to review and look at what your current direct expenses are and what your overhead expenses are compared to your guarantee.

With the March 15th sales closing date fast approaching, this is your last chance to make any changes to your MPCI, so be sure that you calculate your breakeven and know how much income you need to cover expenses, payments, and family living and share this number with your crop insurance agent. They cannot guide you on how much protection you need unless you know your financial position.

Another area you need to look at as part of your risk management is your marketing plan. Because of the volatility the past few years, many producers are scared to forward contract any grain as they felt this has “burned” them in the past. Regardless of what has happened in the past, you still need to manage the risk now. At this point, you know most of your expenses so you can accurately calculate your break-even price. If you have the opportunity to lock in a price above your break-even, whether it is with cash or futures contracts, you need to do it. Because anything you sell for a price greater than your break-even price is called profit, and that is a good thing.

You may contact us at 1-800-684-1969 or www.sdcfrm.com.