Insight
John Schlageck
Saturday, August 16, 2008
Record high commodities coupled with record high input costs and record high oil prices equal volatile times. Without a doubt, this equation is the most volatile in the history of agricultural production in this country.
Still, this time frame affords farmers and ranchers with a tremendous opportunity to lock in a profit margin – if a producer uses the right risk management strategies.
The spread between income and expenses as far as a profitable margin is as wide as it’s ever been, says Dave Spears, who heads up Kansas Farm Bureau’s Agriculture Solutions program. Before joining KFB, the Osborne County native served on the Commodities Futures Trading Commission.
“The key is to take action today,” Spears says. “Many people are indecisive and aren’t sure of what action to take because of the volatility in the market including high commodity prices and high input costs.”
Every Kansas farmer and rancher knows all too well, what goes up goes down. The $64,000 question is when and by how much?
“The biggest fear of most producers today is that commodity prices have risen to record levels,” Spears says. “If, and when they drop off, producers could be stuck with high input costs resulting in a negative situation.”
That’s why risk management tools are essential to help producers keep in the game of farming. Tools like Agriculture Solutions affords farmers and ranchers the tools and opportunity to create a hedge and ensure positive cash flow.
One of the risk-management tools in the Agriculture Solutions toolbox is the Revenue Protection Solution, which provides flexibility, a guaranteed dollar amount per acre and allows a farmer to retain ownership of the commodity.
“We can assist farmers and ranchers with analysis, but also the structure and discipline we offer with Agriculture Solutions provides the comfort level to the banks that are financing our farmers with credit,” Spears says.
Risk management programs also have the ability to lock in prices for more than one year. This allows producers to lock in prices for multi-years both in farm commodities and input costs.
“If input costs go down, we want our producers to benefit from lower prices for their seed, fertilizer, fuel or whatever the case may be,” Spears says. “We want to ensure our farmers and ranchers preserve the upside on income and preserve the opportunity for lower costs on the expense end.”
While Spears concedes some government oversight is necessary, too much is not a good idea.
Those players in the market today provide a significant role and that’s one of liquidity, he says. There must be liquidity in the market to make sure it works.
When you have the government limiting access, amounts and development of liquidity, it could significantly impact price discovery, Spears says.
As for putting the brake on high input prices and oil, Spears is reluctant to give this country’s regulators more power. He’s well aware of consumers who are clamoring for elected officials to “fix” this problem for them.
“Be careful what you wish for,” he says. “You might get it.”