by Enrico Villamaino
There is a humorous anecdote that circulates among farmers and ranchers at various meetings and conventions. It goes something like this: President Ronald Reagan was addressing a collection of farmers at a convention in Las Vegas. Reagan prevailed upon his Secret Service detail to allow him to meet with some of his constituents on the way to his speech.
Speaking to a gambler, Reagan was asked why he was in town. When he replied he was there to speak to a gathering of farmers, the gambler asked him, “What the heck are a bunch of farmers doing in a gamblers’ town?” Reagan smirked and told him, “Mister, the risks these farmers take every year make your craps table look like a game of tiddlywinks.”
Whether or not the story is true, the sentiment behind it and the precarious conditions faced by farmers nationwide every year are very real. In addition to the taxing everyday labors farmers face, they must also concern themselves with managing their existing and upcoming crop yields. Making decisions every day that affect farming operations, farmers confront a number of factors that cannot be predicted with complete accuracy. This uncertainty creates a risk that can have a devastating effect on farms both large and small. As farmers expand and become more commercialized, the stakes are raised and farming becomes increasingly risky. Farmers need to understand risk and have access to risk management skills and practices to better anticipate problems, maximize profits and minimize loss. Unpredictable factors that affect production include everything from changes in the weather and flooding to falling production due to pests and diseases to equipment breakdown to market price fluctuations. Risk also occurs as a result of changes in government policies, which often have a major impact on farm income. With so many external factors outside of their control, many farmers are looking to inventory management consultants for help. By managing price opportunities and risks, inventory management consultants focus on helping to build a favorable average price at which farmers can sell their crops.
“Our goal is to help farmers shift risk and manage opportunity,” said Bryan Doherty, vice president of brokerage solutions at Stewart-Peterson Inc. “We are able to help good farmers become great farmers. The good farmers try to collect as much information as they can to make smart decisions. Unfortunately, the opportunity to maximize their profits often passes them by while they’re collecting current data. The great farmers use market tools and strategies to prepare for what hasn’t happened yet. They can increase their profits this way.”
Inventory management consultants are able to effectively advise those operating farms ranging from 300 acres on the low end to over 2,500 acres and above on the high end. Dairy farmers with as little as 250 or as much as 2,500 cows are also benefiting from consulting inventory management consultants.
One particularly effective strategy, according to Doherty, is the put option. This allows for the sale of assets at an agreed price on or before a particular date. “It helps to alleviate the danger of large profit loss to the farmer due to an unexpected instability in crop prices,” he said.
While farmers have always been required to be “jacks-of-all-trades,” farming in the 21st century requires more than ever from those working in the agricultural sector. Risk management is just one more tool the successful farmer now has at his disposal.