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| If you want it done right, do it yourself |
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| The old adage goes: “If you want something done right, do it yourself.” This is especially true when the thing you want done directly affects your livelihood, like packing your parachute or buying a gift for your mother-in-law. So why are so many of us willing to place the financial future of our farming operations in the hands of politicians in Washington or speculators in Chicago?
In Washington, there is lots of talk about the farm safety net. Agriculture Committee members speak with great passion and knowledge about the safety net, while those not on the ag committee nod their heads in blissful ignorance about what it is.
Farm groups insist we must have one that is “adequate” while the Congressional Budget Office insists we can not afford such a thing. Regardless of what the final version of the farm bill turns out to be, it will have a safety net and it will not be adequate to provide much safety for farmers.
The reason for this is the fact that the financial and marketing paradigms faced by farmers today have changed – a fact unknown to those inside the beltway. While grain prices are sharply higher, so are production costs. This has put farmers at great financial risk and made programs like LDP and Counter Cyclical payments virtually irrelevant.
“What we see happening, increasingly, is what is often referred to in the business world as margin compression. When you combine that with the fact that we are moving our entire price structure up and we aren’t adjusting the government program on top of that, we also have more of what we call margin risk, or risk exposure,” says Purdue Economist Mike Boehlje.
It is likely that wheat and soybean prices for next year will be above $9 a bushel, and corn prices could again top the $4 level. But the cost of growing these crops will also be up significantly.
The 2007 Purdue Land Values and Cash Rent Survey found that Indiana land rental rates were up about 10 percent from 2006, to between $110 and $171 per acre. Seed, fertilizer and chemical costs are likely to increase from 5 to 20 percent this fall, and in 2008, according to Purdue estimates. As a result, growers will face greater risks. Boehlje gave an example of how a farmer could be worse off even with higher crop prices: “If production costs increase by 20 percent to $2.75 per bushel in 2008, average margins would decline to 25 cents per bushel assuming $3 corn. The margin risk exposure increases, as well, because prices could decline below the cash cost of production of $2.75. In a worst-case scenario, assuming no change in the government program, the government safety net of $2.30 per bushel results in the potential of an up to 45-cent loss if prices were to decline below the cost of production.”
So Boehlje falls back on the old adage: “If you want something done right do it yourself.” In this case, it means making your own safety net.
“We need strong risk management strategies to accommodate those risks,” he said. “For example, we need to make sure we are taking a good look at crop insurance products and aggressively using crop insurance. We also need to do forward pricing to lock in prices, even if we think they might go a little bit higher. Even if there’s a chance they are going to go lower, if we have guaranteed ourselves a profit with a locked-in price, margin compression and the risk of loss exposure is mitigated and eliminated.”
Lowering costs whenever possible is also a way Boehlje says you can build a safety net. “We need to make sure we don’t overbid the cash rent market so that we don’t bid our cost structure up into a position we can’t support,” he said.
With a large crop this year, storage space will carry a premium price. Jim Riley with Riley Trading recommends not storing the crop, “Look at selling the crop and buying calls – its cheaper than storage and does not have the potential of as much loss.”
We can not control the weather, the markets, or Congress. What we can control is how much risk we expose ourselves to. Don’t trust the safety net built by others, build your own.
The views and opinions expressed in this column are those of the author and not necessarily those of Farm World. Readers with questions or comments for Gary Truitt may write to him in care of this publication.
This farm news was published in the Sept. 19, 2007 issue of Farm World, serving Indiana, Ohio, Illinois, Kentucky, Michigan and Tennessee. |
| 9/19/2007 |
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