Business & Policy
Rear-View Reflections: How do you plan for uncertainty?
Understanding risk and available resources.
February 16, 2022 Sponsored by Global Ag Risk Solutions
Farmers deal in the unknown and it seems at times we must see into the future. We are coming into a growing season rife with ambiguity; but you can plan with confidence.
A year of uncertainty
While farmers are no stranger to unpredictability, the challenges of last year have put us in a unique position of uncertainty, or opportunity. Much of the grain belt is in a looming drought situation and subsoil moisture may make sustaining growth a challenge.
Lack of availability and the high price of fertilizer have already caused challenges for farmers this season. Due to 2021 drought conditions, herbicide carryover and residual nutrients will be a consideration for many farmers this season in making rotation and agronomic plans.
The markets themselves offer opportunity this year, but with 75 per cent of Agricultural Producers Association of Saskatchewan survey respondents reporting the inability to fulfil contracts in 2021, farmers are reasonably apprehensive. Strong pricing options make taking a long-position tempting, but the reality is stifled by production risk.
Farmers will need to develop a full-farm marketing plan that considers forward looking price opportunity while managing downside production risk.
As operations grow in size and complexity, understanding risk has become a necessity. Farms are getting larger and so too are the costs to operate. Consider a 1,000-acre farm. The business and accounting of this farm may be manageable without outside help. As this farm grows, however, overall costs increase, and the effort and expertise necessary to manage also go up. As costs go up, risks go up.
There are many resources farmers can work with to understand their business risk. Above all else, you should have a good handle on cost of production and gross margin. This means not only understanding your cost of inputs, but also your fixed costs per acre. These are things like labour, equipment, and fuel, as examples.
As a starting point, your accountant can help you understand operating costs and provide a long-term picture of your business. Ag lenders are an excellent source of information on loans and lines of credit, and renegotiating interest, based on your needs. Agronomists and marketing coaches can help plan your farm goals in regards to making timely decisions.
Finally, your insurer should be an ally in helping you understand the complete picture of your business. This is where a company like Global Ag Risk Solutions comes in. As experts in risk management, we’ve been helping farmers for more than 12 years.
Options and opportunity
In general, we find farmers are familiar with options for protecting against risk in traditional ways – like insuring against specific perils or covering a yield threshold. These are great options, but what differentiates our product is it protects your bottom line by ensuring revenue, no matter what mother nature or the markets throw at you. We’ve heard from clients that the biggest barrier to purchasing Production Cost Insurance (PCI) was that it’s unfamiliar. We agree – PCI is farm insurance like no other.
We work with farm families to determine the cost of production and tailor an insurance program based on those costs. PCI covers the cost of seed, fertilizer and chemical, plus a gross margin of your choosing over and above those costs. If you want to spend $150/acre on inputs, and, considering other costs (like fuel and land costs) you decide to insure an extra $150/acre of margin coverage, the total plan is set at $300/acre. A 5,000-acre farm, for example, can move into the year with certainty and $1,500,000 in floor revenue before seeding.
Because we cover actual costs, if input costs go up – let’s say you want to top dress – coverage goes up, but your premiums do not.
This insurance is a game-changer for financial stresses, but it also encourages farmers to not pull back on decisions because of situations that are out of their control – like drought or fertilizer costs. The more information we have, the better prepared we are to make decisions, even in the face of the unknown.
While the weather and the markets will always be unpredictable, your farm’s outcome doesn’t have to be.
Mark Gottselig is a national sales leader at Global Ag Risk Solutions.
Global Ag Risk Solutions offers insurance options for farmers to maximize profitability – regardless of weather. markets or the next combine payment. Chat with an advisor today to learn more about our customized insurance products. Visit agrisksolutions.ca for more information.