Farmers, by the nature of their business, must embrace risk. But at the same time, they need to manage it.
That was a central theme at the 2020 Keystone Agricultural Producers AGM during a recent Tuesday morning panel discussion on risk management, featuring two farm management experts.
Eric Olson, a farm management consultant with MNP’s Winnipeg office, kicked off the discussion by noting that risk management has to come naturally to farmers.
“You’ve been doing it your whole career,” he said. “Farmers are naturally not risk averse, or you wouldn’t be in the business.”
However, Olson also warned that it doesn’t matter how good you are at managing risk, there are risks that are impossible to manage. It’s difficult to guess how trade negotiations are going to affect commodity prices. He pointed out that even random geopolitical events can have unexpected consequences.
“Who would have thought that an executive from a cellphone company in China would get detained in Vancouver, and we would see our canola, beef and pork exports affected to China?” he asked.
He broke down the essentials of risk management in the following points:
- Understanding your financial position;
- Understanding your strategy;
- Understanding how to achieve your strategy;
- Understanding your risk tolerance;
- Understanding your options; and
- Making a plan.
David Sullivan, chief underwriting officer for Global Ag Risk Solutions, was the other speaker to take to the podium.
Sullivan’s discussion was centred on financial risk on grain farms specifically. He noted that managing cash flow is one of the most important aspects of managing risk and that the purpose of buying crop insurance is essentially to reduce risk by managing the relationship between cash flow and cost of production — the gross margin.
Sullivan pointed out data that shows that the top 25 per cent of farms in terms of gross margins are also the top farms that spend on inputs. So, penny-pinching isn’t always a wise choice.
“It’s counterintuitive that they would be spending more on crop inputs, and making more money, but that’s the facts,” explained Sullivan. “Farms that spend money on fertilizer, better genetics, and better chemistry are driving up yields, which are driving up revenues which results in higher net income.”
Farms that spend less on these things have much smaller gross margins.
The audience was then invited to ask questions. Wilf Harder from KAP’s District 3 opened the question period with a question about how and when to defer major equipment purchases. Olson said that it depends on the individual.
“I have one client who is terrible at maintaining machinery and will flip it every year. But he’s more capitalized in equipment, so when that next parcel of land comes up for sale, he can’t afford it.”
He said that he feels land purchases are becoming more of an investment decision, than an “I need to farm” decision.
KAP president Bill Campbell asked the panellists how their companies deal with government regulations that impede the farmer’s ability to get their gross revenue to where it should be, specifically referencing the carbon tax.
Sullivan answered that in the short term, his company would be on the hook for shortfalls that result from something like the carbon tax. But that over the long term, we won’t have to take on that risk because it will just become part of the math.
The final question of the panel discussion was put forward by panel moderator, Justin Jenner. He asked the panellists if they could identify some big strategies farmers can utilize to mitigate risk and secondly, what young farmers should be trying to do to adapt.
Sullivan gave a simple answer. “Grow something someone wants to buy and don’t spend very much money doing it,” he said. “That means looking internally first and getting your own house in order then looking outside to discover the best of the best… attach yourself to that top 25 per cent.”
Olson said the first advice he’d give to any new farmer is to educate themselves. He stressed it’s important to understand your situation, understand your finances, know cost of production and know how your commodity is priced.
“Then look for the shocks,” he said. “There are opportunities in that.”