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How Farmers can Mitigate Risk

How Farmers can Mitigate Risk

 

There are several risk factors to consider outside of production alone to produce a flourishing farming business. These areas include but are not limited to production risk, price or market risk, financial risk, institutional risk, and human risk. Preparing for the unknown through proper risk management of these areas mentioned is something every farmer should consider. The farming landscape is ever-changing, and limiting uncertainties through risk management planning is helpful to your success.

Agricultural & Commercial Lender Ben Hertel discusses two areas to consider that will help mitigate your risk and ensure the success of your farm.

  • Inflation Risk
  • Marketing and Risk Management

Inflation Risk

Inflation is becoming a talking point throughout the industry. Inflation can lead to cash flow problems due to decreasing profitability and purchasing power, which results in increasing debts and decreasing net worth.

By keeping an eye on the factors that can drive margin compression and mitigating them, you can maintain margins even as inflation of agriculture expenses start to increase. Historically, high commodity prices have led to higher business expenses. Areas of inflation to stay aware of, now and in the future, are increasing input rates as a whole, the potential increase in the minimum wage, the push for maintaining lower prices for the consumer, interest rates, and the rising cost of new and used machinery.

Marketing and Risk Management

With higher commodity prices projected and vast uncertainty ahead due to the potential of inflation, effective risk management will help ensure the success of your farm. Don’t fall for the “what ifs” and end up on the wrong end of pricing volatility. Prices can drop just as fast as they can rise. Prepare for all possibilities through risk management efforts.

With generally higher current commodity pricing, contracting salable crops remains a strong play. Locking in a good portion of your salable crop for market sales will help ensure that you will carry a profit through 2021. By now, most of your crop is in the ground and is starting to emerge as we head into early summer. Take the win on the portion of the sellable crops you know will be there come fall.

As your farm expenses continue to rise, prepaying for input expenses to take advantage of discounts becomes more instrumental. Other areas to focus on to increase profitability with better prices are paying down your operating loans, improving equipment and real estate, and staying on top of management practices to continue building efficiencies. With rising prices, producers tend to relax on management but should continue to sharpen these practices to maximize profits for a better future.

Planning Ahead

Our Prevail Bank Commercial Lenders will help guide you along your financial journey and help you plan to ensure the success of your business. Contact a Lender today!

Meet the Lender

Ben has been in the banking and commercial lending industry for six years. He has been at Prevail Bank since Oct 2019 and serves as a Commercial Lender in our Marshfield, Medford, Owen, and Phillips locations. Ben enjoys being part of a business owner’s financial management team and assisting them along their journey. Involved in the local Marshfield community, he is a leadership member on the Marshfield Area Chamber of Commerce & Industry.

 

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