Farming is a risky business. With changing policies, weather events, global dynamics, and other factors beyond a farmer’s control, it feels less and less predictable each year. While market volatility has been part of agriculture for decades, today’s commodity prices react even more quickly to the influences of a world market, underscoring the need for a strong risk management strategy.
As ag business advisors, we have been on the front lines of helping producers strengthen their operations, protect their margins, and offset ag market risk. Pinion ag advisors share how to manage your top three farm risks: profitability, market risks and cash flow.
Know your profitability.
One of the most important criteria for making marketing decisions is knowing profitability. “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,” says Eric Osterhaus, Pinion ag marketing strategist.
Pinion Pro Tip: Work with a strategic advisor to identify your costs of production, break-evens, and production estimates – the primary drivers in a good marketing plan.
Identify potential market risks.
The impacts of the Russia-Ukraine war, rising input costs, and extreme weather point to volatility ahead, so it’s critical to understand how factors like this could affect your operation. “What if you can’t get the parts or supplies you need for next year? Do you have crop insurance or a livestock loss program in place?” asks Pinion ag advisor, Kala Jenkins. “If you lose your buyer or customer, where else could you sell?” It’s less about watching for the sky to fall – and more about preparing for a rainy day to mitigate impact.
Pinion Pro Tip: Understand your risk factors, mitigate their impacts, and pursue opportunities and solutions to weather ever-changing markets.
Build up and manage cash flow.
Cash is king on the farm – especially in a crisis, downturn in the market or other unforeseeable event. Cash and cash flow are going to get your business where you want it to go, despite the uncertainty that you face. “I encourage farmers to get access to cash and capital when you don’t need it, so it’s ready when you do need it,” advises Pinion finance and growth consultant, Peter Martin. “Don’t be afraid to take on a little bit of leverage, especially if it’s used to backstop your working capital.”
Pinion Pro Tip: Focus on improving your cash flow. Examine expenses to increase your profitability and cut the extra fluff, revisit your debt schedule to see if you can optimize your structure, and invest in ways to control your inventory, such as on-farm storage.
Contact a Pinion advisor to establish a proactive risk management plan for your operation. Pinion’s insights have helped position agribusinesses for both survival and success – enabling effective decisions and productive results.