Glacier FarmMedia Response to COVID-19

Risk management in a chaotic world

How should you manage your price and production risk in a year when prices are unpredictable?

Photo: Thinkstock

Impeachment trial, Israeli/Palestinian conflict, trade disputes, passenger planes being mistakenly shot down, countrywide rail blockades and a health epidemic that’s sending shock waves through world markets.

How can you keep your farm from becoming a casualty of these unpredictable events?

In previous articles, I’ve discussed how improving management practices can ensure your farm is running as efficiently and profitably as possible. Within these management practices, there is the risk management component. At times like these, risk management becomes a key focus area for farm managers.

What level of crop insurance coverage should you take to cover your production risk? Should you take extra hail insurance? Should you consider a band of coverage from a revenue insurance product that also offers contract-buyback protection?

This can reduce delivery risk on pre-priced grains and allow you to market more aggressively throughout the year.

Managing marketing risk

When outside influences rather than supply and demand are driving world markets, we don’t know if markets will recover quickly or if we will see a continued downward price spiral due to the fear of the unknown.

After the harvest from hell, adding outside, uncontrollable factors that influence world prices and your focus going into this growing season has to be on taking every opportunity to lock in profitable prices. Why gamble, when you can take a profit?

There are a number of ways to go about pricing grain for next year.

You can pre-price grain for future delivery on a production contract, a fixed-price contract or a futures or basis contract. Or, you can buy or sell a futures or options contract for canola or wheat to position yourself for forward sales opportunities.

You can wait until you have the grain in the bin and then sell into the cash market or forward price for future delivery to take advantage of market premiums. Waiting until the grain is in the bin could mean missing out on profitable early-season pricing opportunities.

I would consider production contracts with an Act of God clause the least risky way to pre-price grain for future delivery. Use them whenever you can, as they provide good value with little or no delivery risk.

Other risk management tools

The next best, or cheapest, way to pre-price grain is a fixed price contract where you lock in a net price for fall delivery. There is no cost to this, but you do assume the delivery risk should you not be able to deliver the grain in the fall.

Reducing or eliminating that delivery risk is possible, but it comes at a cost.

Some grain companies offer options contracts that can be attached to your fixed price contract, at a cost. Or, you purchase a call option through your broker to offset your delivery risk. This can bring great peace of mind through the growing season.

With a revenue protection policy in place (like GARS), you can pre-price grain for the fall and not worry about delivery risk as it is covered in your policy to a certain value. Again, you need to determine the cost of these two different strategies to see which will work best for you.

Next, you could consider using futures first contracts to lock in a futures price on your grain and lock the basis in at a later date. Not all grain companies offer futures first contracts and some charge a fee. Ask before you commit to a contract.

In times of downward market cycles, profitable prices may not be as easy to realize as one may hope. When they appear, you need to be ready to react and lock them in. This could mean being a little more aggressive than you would normally be. Have a plan for how much risk you are willing to carry, and how much risk you will offset with insurance or options. Factor those insurance costs into your plan for profitability.

COPA Medallion COPA finalist in 2012, 2014 and 2015.
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