Risks and Advisors

I spent part of today working on a presentation I will be doing next month in Indianapolis. The topic is ‘The Next Generation of Production Systems’. As I worked on this topic, I thought about how the world of pork production has changed. Our parents witnessed a large change in pork production systems, and the associated rewards and risks that are associated with this enterprise. In the past 6 months, with the collapse of many in the financial markets, and the associated impacts on the world markets, the rate of change makes our parents look like someone walking behind a mule versus our plowing with 10 bottom plows.

 

I think the best illustration of this is feed grain and fuel pricing. Everyone has always talked about risk management in agriculture, but for many producers, cash has been king. This meant that producers with a strong equity position didn’t worry about pricing decisions as much as those who were operating with large amounts of borrowed capital.

 

In late July and early August, I was hearing tales of grain farmers pre-paying for next years anhydrous nitrogen needs at up to $1050 per ton, which is $0.61 per pound of nitrogen. I’ve heard recent reports of local prices dropping to $750 this fall ($0.436/lb N). Now there is discussion of spot shortages next spring and early summer as farmers aren’t booking and pre-paying for any more fertilizers as the world price for oil and phosphorus continue to decline.

 

Feed grains another example. Corn was over $8 per bushel this summer and now local bids are very close to $3.20/bu. Soybean meal has dropped from over $400 per ton to producers reporting they have booked meal for the next 9-12 moths at prices under $250/ton delivered.

 

All of this suggests that the risks involved in financing a production agricultural system today are huge whether that system is feed grain production or animal agriculture. It appears to me that those that will survive and prosper are those that become very aggressive in risk management and the associated decision process. While cash may have been king for many years, the gyrations in input costs these past 6 months have eroded the equity position of many who made the wrong risk decision.

 

As I worked on my presentation, one of the points I intend to make to the producer group is that to prosper in these times of rapid price gyrations, the successful producer will rely on an advisor team. Notice that I stressed team, and not advisors as individuals. In my experience, there is much to be gained in strategic planning by producers of all sizes and types of agricultural enterprises when all of the individuals a producer relies on for advice are involved in the discussion and decision process. It is very frustrating to have to offer advice to a client when you don’t know the whole story behind the decision process. It is quite possible that my advice will differ if I have access to all of the facts, rather than my observations based on conditions the day of my visit.

 

I also think members of this advisory team should be selected in part for their access to others with advice and experiences that will make the decision process better. In other words, look for advisory team members who aren’t afraid to turn to others to make their input into the decision process even better.

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