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Risk Management, Farm Policy Critical During Farm Economy Slump

The business of raising corn, soybeans, and wheat isn't what it was a couple of years ago. Now that the well-foreshadowed profit downturn for grain farmers has arrived, attention has turned to ways to keep it from gouging your bottom line too much.

Ag lenders in a big chunk of the nation's midsection say the best ways to do that is lay out specific risk management goals for the short-term, take care of them, and take advantage of the time now to familiarize yourself with the new farm program and ways it could affect you and your farm's bottom line -- both positively and negatively --  moving into the more distant future, according to a report from AgriBank, a Farm Credit System bank covering 15 states in the Midwest and Plains.

"The poll reflects the reality that grain commodity prices are lower compared to last year, which will likely have some negative impact on profitability for crop producers this year," says AgriBank vice president Jerry Lehnertz of a survey released to ag lenders in the bank's territory stretching from the northern Corn Belt to the mid-South and the eastern front of the Rocky Mountains to the eastern Corn Belt. "On the flip side, most crop producers have entered this lower commodity price environment with strong overall financial positions. In addition, producers who purchase these grains as inputs for dairy products, ethanol, livestock, and poultry may see increased profitability resulting from the lower grain prices."

The majority of the bankers responding to the AgriBank survey said risk management strategy execution and flexibility in the face of an ever-changing farm income picture is of utmost importance to buffering the profit hit right now.

"We are seeing commodity prices return to earth after a period of remarkable growth," Lehnertz says in an AgriBank report. "But smart financial strategies can help commodity producers maintain healthy financial positions through these challenges."

He recommends the following steps for farmers based on ag lender feedback in his bank's latest survey:

  • Start by setting well-defined goals and objectives.

  • Gather farm-specific production information, including historic yields, crop insurance levels, fixed and variable costs, to better understand your unique circumstances.

  • Look at commodity price scenarios, not just market forecasts, so you can be better prepared for the unexpected.

  • Develop a customizable marketing toolbox so you can access the tools you need.

  • Be sure to have a flexible marketing plan so you can adjust to changing market opportunities and challenges.

Though the farm bill and policies it enacts aren't always the most pleasant topics for discussion on the farm, they may hold the key to getting through the downturn, too, Lehnertz says. Though the aforementioned risk management tasks should be of high consideration in the short-term, looking at how the farm bill will affect those tasks and their management will grow in importance in the mid- to long-term.

"Many Farm Bill implementation details have yet to be determined and, with the elimination of direct payments, crop producers will have to choose between several programs that provide income support under adverse price or yield conditions," according to a report from AgriBank. "More than 76% of the chief credit officers surveyed said farmers are talking to their Farm Credit lending officers (or crop insurance specialists) about how the new Farm Bill will affect their operations."

Adds Lehnertz: "Producers are actively discussing the Farm Bill, even as many program details have yet to be determined. The Farm Bill is just part of the equation when it comes to farm finances and risk management. Farmers and ranchers are talking to experts such as Farm Credit to help them navigate an increasingly complex and volatile operating environment."

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