Alliances to Remain Profitable
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Steve Martin is a wild and crazy guy. I love to watch his movies because they renew my faith that there is someone nuttier than I am. The turbulent times of the past twelve months in agriculture have caused many farmers to ponder: “Am I crazy for continuing to farm?” For a long time farmers have had a reputation of being a riverboat gambler. They invest hundreds of dollars in an acre and hope it rains at the right time and a profitable price occurs at harvest, neither of which is guaranteed. This brings me to the topic of this article, risk management in agriculture. We all encounter risk. Every time we climb into our car or tractor, we hope that no one hits us head on. Most of us would grimace at the thought of trading the risks we face for those that the typical commercial farmer faces. Droughts, floods, pests, and plummeting product prices are some of the more obvious devastating forces in the farm business. We need to recognize that the risks are increasing and we need to spend more time managing risks. Let’s begin with the weather. The drought of the 1930’s led us into a relative stable weather period from 1940 to 1980. Yes, there were dry periods, etc., but you could count on some consistency in the weather patterns. Then in 1981, it rained till June 12th. Since then, weather has been anything but predictable. Climatologists will agree that the next two decades will be filled with weather patterns that vary greatly from the norm. If this is true, we need to reassess our position on crop insurance. The government realizes that farmers have a “bad taste” in their mouths concerning crop insurance and many changes have occurred in the program, and many more are being contemplated. Look for the government to make the costs more attractive. With violent weather swings, can we afford not to purchase it? Maybe it is time to re-think tenant-landlord leases. The number one arrangement is cash rent. Why? Because it is simple and reduces farm accounting plus there are other advantages for landlords. The problem with cash rent is that the tenant assumes almost all of the risks. One must ask the question, can the tenant continue to accept all of the risks? Variable cash rent leases allow the landlord to accept some of the risks and in good years, he gets rewarded for it. Computer programming simplifies the accounting for 50-50 leases. The old saying that nothing beats a good 50-50 lease is valid today. The past five years have seen a dramatic growth in the number of tools available to farmers for managing annual revenue risks. Some of these tools include multiple peril crop insurance, grain marketing options, producer-packer contracts, and specialty crop markets to mention a few. There is a lot of volatility in grain markets today. A set of well-maintained financial records is an absolute necessity to maintaining control of a farm. If you are not on a computer, give our FBPA Instructor, Carl Besst a call at the JVS. It will be one of the best farm calls you have ever made. In conclusion, risk is as integral to farming as is weather, prices, and technology. We need to concentrate harder on managing risk. If we don’t, we will become a “wild and crazy guy.” Keith L. Smith, Associate Vice President for Ag. Admin. and Director, OSU Extension TDD No. 800-589-8292 (Ohio only) or 614-292-1868 Updated: November 1999 |