Contingency Planning for 2008

Heather Moffatt, Grain Risk Management Advisor, Agricultural Marketing First

By now the crop is in the bin, and most of the field work is done. The planning part of your business year is starting to unfold. Tax time is rolling around and business plans for the upcoming year are being put in place. The task of creating a business plan and marketing plan for the year ahead is not often looked upon as the most enjoyable farm project. If you’re part of the majority who enjoy production agriculture, but have grown frustrated with attempts at devising a projected marketing program, you’re not alone. The trouble with a marketing program is that it is an evolving document. Because costs and futures prices are always on the move, the plan needs to be revisited, probably on a quarterly basis. Actually, you need to apply the same principles you do in production agriculture. We never plant our corn, soybean or wheat crops and walk away from them until harvest. Today, keeping an eye for needed applications of pesticides or fungicides is a common practice. A late planting season may mean a switch to an earlier hybrid. We often need to revisit and change our crop
intentions. The same principles apply to your marketing program.

The following are some key considerations to help create success as you go forward into the 2008 crop year. First and foremost, it is important to keep a
positive attitude. We’re seeing a lot of volatility and with that comes increased risk. Risk has been heightened on the expense side of the balance sheet as well as
the income side. You may have started to price some of your 2008 (new crop) production, but have you locked in your costs? Risk can be perceived as motivational or incapacitating. Creating the right program with specific goals and targets in place is motivational. With little or no direction, risk becomes
incapacitating. Even though in agriculture there are many variables such as weather, that are out of our control, we are ultimately in control of our own destiny. Creating a plan that puts you in control needs to be in place for your peace of mind and bottom line.

As a business person, Moe Russell of the Russell Consulting Group states, you need to “bullet-proof your balance sheet”. First assess your working capital, which is defined as current assets minus current liabilities. Assets would include cash, prepaid expenses, grain and livestock to be marketed over the next 12 months and accounts receivable. The total of these, less accounts payable, operating debt and term debt payments – principle and interest - due over the next 12 months (current liabilities) is your business working capital. Working capital includes all assets less operating expenses and living expenses. Working capital is the first “buffer” against adverse times. Generally, total equity should amount to greater than 50 - 60%. If you have one million dollars of total assets, your debt should be $400,000 or less. This can be quite variable given each farm operation. Although we’d like to believe these lofty futures price levels are here to stay, we know securing profitable margins should be an ongoing process.

Cash rent and input costs in all probability will stay high again this year. Don’t be shy about sharing cost of production with your landlord. Many might hear about costs increasing but tend to focus on high futures values. Make sure they understand all price variables. Plan ahead for upcoming input costs by keeping
in contact with your suppliers. Supplies in some products could be tight. Ensure you’ve assessed input requirements, and work with your supplier on pricing. It will be more important than ever to have these arrangements in place this season.

Volatility is extreme, experienced not only in the grain futures market, but energy and currencies as well. If that isn’t hard enough to manage, basis levels have moved to unprecedented levels as cash adjusts to world values and local market fluctuations. A study out of Illinois reports, on average only 10% of all corn and 20% of all soybeans are sold prior to harvest. Statistics show that 80% of the grain sold is at the bottom 20% of the price range. Contract price ranges have expanded brought about by speculative participation and record volume. Volatility creates opportunity. Create a marketing program which is diversified. Revisit it as market conditions change throughout the year.

The current marketing environment has created its share of challenges, but great opportunities also. If history repeats itself, this period of volatility won’t last forever. Planning ahead for 2008 by carefully assessing and eliminating price risk along with securing strong prices will create a balance sheet that ensures profitability in this highly volatile environment.