There are so many methods and calculations to measure risk in any business or investment. Naturally, there are so many ways to evaluate risk on a farm. The principle remains that potential return rises as risk increases.
One of the first risks we are faced with is growing a crop and not being able to sell it for a profit. I was recently in a conversation debating the risk of forward-selling grain. Clearly all farms have different views of risk, different financial/storage situations, and various techniques to conduct their sales.
Here is an example of how I view it:
Let us say that you are a manufacturer of t-shirts. You have an order for 250,000 shirts that you can sell for a guaranteed profit. You sign a contract to produce the 250,000 t-shirts before they are actually made. What happens if your shop burns down or your material supplier raises your costs or goes out of business or all your staff quit and you can’t produce that many t-shirts to fulfill your contract objectives? Now what? What if the buyer of those shirts has already used them to fill orders in their own shops? Now they will have to buy other shirts to fill their orders and they may have to pay more money and, therefore, charge you a penalty.
On the other hand, what if you are to spend the time/money to produce 250,000 t-shirts to sell and you have no buyer lined up? You could be left hanging on these costs. Some businesses will be able to weather that storm. Others will suffer from having already spent the money to produce the shirts, packing and storing the shirts, operating their business on credit moving forward, and having little to no opportunity to invest their proceeds in higher returning investments.
This is a comparable situation to growing and selling a crop. If you are growing a crop and have the opportunity to lock it in at a guaranteed profit, there is still a risk to that. What if you get hail, disease, frost, etc., and you’re left with down-graded product or nothing left to sell? The buyer has already sold your product, so you are faced with discounts and/or contract buy-outs. In 2014, these penalties were quite severe for some farms.
On the other hand, if you don’t take the opportunities to lock in product at a guaranteed profit, there may be severe consequences, as well:
-You may end up having to move product at a loss just to get the cash-flow.
-You may have to wait a long time to just be able to move the product – period.
-You may have to operate your business on credit while waiting for sales to happen.
-The price of your commodity may not reach your target for a long time.
-If you carry grain over, you are at a huge risk for downgrading and spoilage. You need to pay the price to have extra storage room and monitor bins and/or have air circulation to prevent heating. Last year I witnessed durum heating and downgrading to feed. The growers had been checking the bins regularly, went away for a couple days and the next time they looked was too late. I also learned of some peas heating last summer. Barley loses quality over time. Lentils lose colour and downgrade if left in the bin. We all know the possibility of oilseeds heating.
-You may be missing an opportunity to sell at a profit and invest those funds into something else if you don’t need them for income or cash-flow.
Therefore, (in my opinion) it is wise to follow market signals, sell in the top range of prices, and turn your crop over frequently.
Global Ag Risk Solutions empowers you to be a risk-taker!
“To get profit without risk, experience without danger, and reward without work, is as impossible as it is to live without being born.”
Go ahead and take all kinds of risks and reap all kinds of rewards!
I wish you all the very best in the upcoming Crop Season! Enjoy all the amazing benefits of farm life! Be profitable! And, of course, remember to be safe!
By Lacey Gerbrandt
FarmLink Marketing Advisor