Stop Using the Term "Risk Management" On Farm
Today’s blog post is a guest post written by Cullen Wilson, a grain merchandiser in South Dakota. Cullen spends a lot of time working with farms and helping them build and execute farm specific marketing plans.
Many people in his shoes consider themselves Risk Managers and communicate that to the farmers they work with.
But is that really the correct way to think about grain marketing from a farmer’s perspective? He doesn’t think so.
Here are Cullen’s thoughts on farm “risk management”…..
A majority of farmers are risk tolerant.
According to a survey put out by Farm Credit Services of America in May of 2017. The survey found, “the majority of producers view themselves as being risk tolerant rather than risk-averse: 58% versus 42%.”
Most grain merchandisers, ag lenders, marketing advisors encourage risk management on the farm and rightly so.
How do you think those conversations go?
I have had those conversations hundreds of times but lately, I’ve been adjusting my approach and trying to gain understanding of why and how a farmer makes a marketing decision.
At a routine quarterly meeting with a large South Dakota farmer, we laid out a plan and talked about his needs. I asked if he was ready to take action. He said he was going to wait. I said, “What about your risk?” He set back in his chair and threw his hands up and said, “I have to take on risk to make all this (his farm) go, that’s how I built this farm.”
That farmer was risk tolerant. It is his capital on the line. His balance sheet is much larger than mine. How can I challenge the guy?
A second event that caused me to change my approach is reading Farm Credit Services of America’s Grain Marketing: Producer Practices and Attitudes Survey (if you haven’t read the survey, read it today) Here is the link. The survey confirmed what I had been experiencing in the field, that the farm is not connecting with the “risk management talk.”
Risk management is essential however I’ve learned to distinguish different types of risk. There are two main risks on a farm:
- crop production risk
- price (financial) risk.
I observe crop production risk gets more attention than price risk.
It seems the farmer is risk tolerant of price and risk-averse when it comes to crop peril.
How does it feel to go through a drought?
How does it feel to watch the crop (the farm’s investment) wilt in the heat?
Crop peril is devastating to the mindset and those memories stick with a farm a long time. Crop insurance is a great tool to manage crop production risk. Crop insurance is difficult to understand and it’s an intangible; one can’t see, touch or kick it.
Strides are being made on using crop insurance as a tool for marketing and decision making.
Price risk is very important to farms but I observe more are concerned about financial reward, rightly so.
Those of us in the risk management industry promote profit as the goal, right?
Farms know when they need cash flow and need to move grain. Some use the time in between cash flow and logistical needs to see if they can find improvement in price. I see some take risk-off by selling the appropriate amount bushels for cash flow and logistics and staying long the market on other bushels. I’ve also tried to study balance sheets and have learned that some can stay unpriced because of a balance sheet situation.
Viewing a grain sale only through the lens of “price only” has been futile for me.
There are many factors that go into making a grain marketing decision that I hope to cover in a later blog post.
The FCSA survey asked farmers rank their potential risks. “Crop Weather Risks” rank number one and “Price Risk Within Crop Year” as number two.
It’s been very rewarding to equip a farm to distinguish between the two risks of crop peril and price risk. When a farm gets comfortable with the tools and methods of handling crop production risk, I’ve seen them make really good marketing decisions.
I’ve removed “risk management” from my conversations. I’m focusing on needs. Listening and trying to understand the farm’s position goes a long way. Managing risk and reward is the name of the game.
Grain marketing will always be hard in practice because of a dynamic market and let’s face it, the financial stakes are high.
Using tools like Harvest Profit (try a 14-day free trial here), crop insurance, marketing tools along with building a team of ag specialists can equip the farm to navigate the dynamic market and make decisions around risk and reward.
Send me questions or comments to email@example.com or follow me on Twitter @cullenjwilson
Cullen is passionate about all things grain marketing. He has a genuine appreciation for the challenges farmers have marketing their crop and has worked closely with 100's of farmers in helping them develop and execute farm-specific grain marketing plans. His hometown is Plankinton, SD. He graduated from SDSU with an economics degree in 2005. After graduation, Cullen spent seven years running a small service business near Garretson, SD as a farrier. Cullen started in the grain industry with an ethanol company in 2013 as a DDG merchandiser selling DDGs for eight ethanol plants in the eastern corn belt. Cullen joined the DPAC team in April of 2015. Cullen grew up in a family involved in the Ag construction business and a west-river cow calf operation. Cullen enjoys serving the Ag community.
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