Just as the American freight industry simmers, Russian referendums and statements are causing a frenzy in the wheat market. While the effects are uncertain, market experts are predicting an increase in market volatility as a result.
Global supply chain disruptions like these, coupled with pricing uncertainty, and of course the weather conditions, are making it more difficult than ever to operate farming operations in traditional ways.
“There are just too many factors working against you, and the future requires a different approach,” says Pinion Ag marketing strategist Eric Osterhaus.
It is important to recognize that price does not trade on fundamental reasons alone. It is easy to stick to fundamental headlines too long and end up being caught by a headline that changes the market dynamic, oftentimes causing producers to market defensively.
“As the agricultural markets have become more global, this has added complexity to simple seasonal supply and demand fundamentals. Without adaptation and proactive risk management measures, your business is a sitting duck for disaster.”
What can producers do and plan for?
One of the most important criteria for making marketing decisions is knowing profitability. Identify costs of production, break-evens and production estimates are primary drivers in a good marketing plan.
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.
The bottom line is that complexity and volatility will remain part of the agricultural picture. Producers tend to desire simplicity when it comes to how they market. They often fall back on traditional marketing methods, regardless of evolving markets that make those methods less effective.
Understanding risk factors, mitigating their impacts, and pursuing opportunities and solutions will be essential for succeeding amid ever-changing markets.
10 steps to build a strong risk management program
1. Take an honest, personal assessment of your knowledge and skill of marketing tools.
2. Value the data of your operation. Invest in technology needed to gather this data.
3. Find a mentor that you trust. Look for a fiduciary, not transactional relationship.
4. Establish profitability goals in advance.
5. Know your risk comfort level.
6. Identify market risks and develop hedging strategies in advance.
7. Review strategies periodically and refine if needed.
8. Plan for cash-flow needs in marketing decisions.
9. Invest in ways to control inventory, such as on-farm storage.
10. Leverage crop and livestock insurance in your risk management decisions.
Contact a KCoe advisor to help with grain or livestock ag marketing strategies and risk management plans.
