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will pay dividends when it’ s time to go to market.
Why is this important? Farm Progress by Informa explains:“ Effectively managing financial risk depends on good records, cost-of-production analysis, and financial statements and analysis to make informed decisions and position an operation for financial stability and viability.” Knowing your numbers provides a foundation for nearly every business decision.
As an example, consider two corn growers who receive the same bid from a local elevator. Both growers know their numbers. One has a break-even price of $ 4.35 per bushel and the other one needs $ 5.05 to cover costs. Even in the exact same market, the bid may represent a profitable business opportunity for one but a losing proposition for the other.
Having a firm grip on the numbers is extremely valuable information in uncertain times. It may not eliminate risk, but it is one of the best tools available for managing it.
Market By Method, Not By Emotion
Few decisions create more stress than deciding when to sell. Every producer has watched the market rise after making a sale or fall after deciding to wait. Those experiences can make it tempting to hold out for the perfect price.
Unfortunately, the perfect price is usually only discerned in hindsight. The reality is that nobody consistently sells at the high of the year. Markets are constantly influenced by weather,
“ The farmer has to be an optimist or he wouldn’ t still be a farmer.”— Will Rogers exports, government reports, currency fluctuations, and countless other factors that are impossible to predict with any certainty.
Rather than always trying to hit the highs, successful marketers often focus on consistently capturing profitable opportunities. Many advisors recommend making incremental sales throughout the season rather than pricing an entire crop at one time. This approach spreads risk across multiple opportunities and reduces the likelihood of a single poorly timed decision having a major impact on profitability.
For example, an astute wheat producer’ s business model has him selling 25 % of his expected production at planting, another 25 % during the growing season, and several additional bushels after harvest. That producer may never hit the annual market high.
For some producers, that may sound like heresy. Who would do that? But, here’ s the thing: that producer is also unlikely to suffer the consequences of having an entire crop exposed to a sudden market downturn. He may not always hit a home run, but some well-timed base hits over the course of the season will still put him on a winning team.
That brings us to another strategy with a similar concept.
Diversify: Put Your Eggs in Different Baskets This remains one of agriculture’ s oldest and most effective risk-management strategies.
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