Focus your energy on risk management, other farm-level strategies

With its many production and marketing variables, agriculture is a volatile marketplace and has been for decades. That’s no surprise to farmers, ranchers and others in agribusiness who have weathered past cycles…including the experienced ag lenders and finance specialists at Conterra Ag Capital.

Right now, that volatility has never been greater. It’s causing some of the world’s largest financial institutions to re-examine industry investment positions and financing of even some of the largest, most historically profitable worldwide ag companies. And that is getting headlines around the world. It’s simply a financially risky time for agriculture at a macroeconomic level — one where many stakeholders lack the farm-level expertise necessary to truly understand an agricultural business and how it operates.

Still, even the most risk-tolerant global ag financiers are taking a hard look at their stakes in the industry. That doesn’t necessarily impede securing farm-level financing, especially when leveraging the right risk management strategies and working with a lender with “boots on the ground” and a firm understanding of what it takes to operate a successful agribusiness.

Understand factors driving global ag investment angst.

The 30,000-foot view of the ag economy includes issues like a challenging global grain export sector and consumer acceptance of things like GMOs in the food supply chain. Add global and domestic policies that sometimes compound existing challenges to the equation and it is clear why risk has risen for the ag sector as an investment target.

The main factors driving the risk-off attitudes of some global financial institutions about financing the ag sector have one thing in common: They’re out of the hands of ag producers. Farmers and ranchers can’t control consumer attitudes toward food production nor can they control interest rates. That’s not to say ag producers are without recourse and stand to lose financial standing just because the world’s largest banks may be getting nervous.

Control what you can control.

While these worldwide issues do influence the overall financial health of the ag sector, you can’t control them from the farm level. That makes it important to first put them in the right context. If you can only do so much in communicating the benefits of GMO crops, for example, you likely won’t sway consumer sentiment enough to justify discussing it at length. Instead, focus on practical, farm-level strategies including following:

Lock in profits. At the farm level, grain farmers can leverage marketing tools like hedge-to-arrive contracts to help lock in grain cash prices at levels that will maximize revenue potential in specifying future grain delivery dates. Consider these types of grain contracts to not just lock in prices, but also to help manage supplies and spread out sales to ensure year-round revenue opportunities.

Think differently about managing debt. Long-term debt can seem daunting for some operations, but there are ways to lighten its impact. Restructuring land debt and taking advantage of near-record-low mortgage rates can help chip away at that debt and free up working capital without creating additional long-term losses. Think in terms of shifting debt to lower interest rates while they’re available like they are today.

Get professional. Large ag companies take risk management seriously; it is a distinct role in the financial side of companies like ethanol refiners and cooperatives. Take a similar approach with your farm or ranch, applying risk management to strategies that will have the most financial benefit to your operation. Working with a marketing analyst and other trusted advisors can help you create a risk management strategy that is both easy to execute and adequately addresses the risks inherent to what you produce, whether crops, livestock or other commodities.

Think big picture. While it’s easy to get swept up in the news headlines about macro-level influences on the global agribusiness sector, don’t let them keep you from prudently managing the day-to-day farm-level risk on your operation, as well as understanding how that risk can influence the long-term viability of your operation. That’s especially true in planning for your farm’s succession or transition. Stick to the fundamentals including long-term financial objectives when planning for your farm succession well in advance. Also, keep all farm stakeholders and trusted advisors abreast of your transition plan.

Don’t be afraid to pay for good advice. This is a tough one for many farmers and ranchers, especially when farm revenue is down and profits are elusive. But the best guidance — be it from an accountant, attorney or marketing consultant — often has a price tag. It’s important to consider both cost and value to your operation in making and sticking to plans, especially when it comes to risk management.

Stay focused, let us know how we can help.

Agriculture is a volatile business right now — more so than normal. There are macroeconomic factors catching headlines around the world. But issues like global ag trade and consumer preferences are often not within your control at the farm level. Don’t let those headlines divert your attention away from where it should be: managing risk on your operation and accounting for the variables you can control in sustaining your business through this period of high volatility. If that strategy involves how you finance your operation, let us know. Conterra Ag has the experience and expertise to contribute to your financing strategy to meet the challenges you face … now and in the future.

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