Protecting against external risk

Risk and volatility are two very common terms being discussed and analyzed in the agricultural circles today. The reason for this is the unprecedented marketplace the agricultural industry and more specifically the beef industry finds itself currently in.

Nevil Speer, animal scientist at Western Kentucky University, discussed the issue of volatility with more than 500 beef producers at Cattlemen’s College held in conjunction with the 2012 Cattle Industry Convention in Nashville, TN, in early February.  “As we deal with volatile markets and tough times, what’s good for any business is not good for every business,” Speer noted.

The corn market has seen the most dramatic shifts many of us have seen in our lifetime, Speer explained. “We used to be in this nice tranquil world, but that’s not the case anymore.” “We are facing times with a much steeper regression and much more volatility — times that are requiring higher capital requirements to remain in the business.” This added volatility creates a more complex trading puzzle with markets more intertwined than ever before. “Producers in times such as these need to by hyper-vigilant in terms of their decision making, marketing and/or risk management.”  The higher prices being experienced in today’s agriculture sector, has altered the underlying capital requirements it takes to maintain normal business operations.

In order to protect against external risks, Speer outlined six points producers should focus on:

 Lock in margins.

1. Refinance long-term debt. Manage your debt load and take the time to work with your financial manager/banker to understand your debt load.

2. Pay down debt.

3. Increase working capital reserve.  If you don’t have the capital set aside for unexpected scenarios you may be forced to sell an asset, which you don’t really want to or which can have a greater impact on your operation, than if you were prepared and had working capital set aside.

4. Carefully, and conservatively evaluate expansion opportunities.

5. Manage Costs. Know your costs and realize they make the difference in profitability.

Source: Lynn Gordon

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