Why Future Generations need Risk Management Skills

Last Thursday after one of my classes, I jumped on to the computer and checked the markets. I knew the WASDE (World Agriculture Supplies and Demand Estimates) were going to be coming out, and wasn’t sure what to expect.

As soon as I pulled up the page of the different commodity markets, I was amazed at how fast prices dropped. Just the day before corn was at $6.50 and that morning the market was showing a price of $6.11. Right there was a 39-cent drop, which could have been a 39 cent gain had a producer pulled the trigger and sold it the day before. The reason why we saw such bearish prices on Thursday was from the fact that corn production was estimated to be up by 48 million bushels.

Not only was corn production up but so were the soybean ending stocks. Soybean ending stocks were reported to be up by 45 million bushels. These factors along with a few others caused the commodity markets to become pretty bearish for the day. It is interesting how much the markets can move within hours, even minutes sometimes!

So one who might not be familiar with markets may ask why they can swing so rapidly within a day? There really is no one answer to that question because there are so many different factors that have an impact on the agricultural markets these days. It could be reports, weather, production, news, and many other current events taking place around the world. While it is interesting to see these price swings, it can be nerve racking for a producer who hasn’t locked in prices. There is no doubt that producers have to be able to manage risk in today’s marketing environment. However, my opinion is that risk management will play an even greater role in the future because there will be new risks that will develop. Also, I believe it is important for my generation to learn the different risk management skills available today so that there is a foundation for the future when new risks do develop.

You might be asking yourself about which risks generations like mine will face. The first and foremost will be the end of direct payments from the government and also a more complex crop insurance program. Although in the immediate future, direct payments will be gone; we still have the crop insurance program. However, if our government can’t figure out a way to resolve our debt problem, they may look at doing away with a safety net for farmers and ranchers if commodity prices stay high. Another risk that future generations will have to manage is weather. Although the jury is still out on climate change, there is no doubt that flooding and droughts will stay around for the long run. Will we see them every year? No, but it will be something that we will have to manage, and if the government doesn’t help provide protection against crop or livestock losses, it will be another risk that farmers will solely have to bear.

Many also don’t think debt as being a risk that future generations will have to learn to manage. Right now, the younger generations are seeing the good times in Ag where their fathers or employers are going out and investing in new machinery and better inputs. Some farmers are even able to trade equipment on year-to-year basis because they can afford it and there is very little debt. However, if corn prices fall back to $3, it will become tricky to finance the purchase of new equipment and inputs. Unfortunately, even if markets become very low, manufacturers of agricultural products won’t lower their prices to match poor markets. So that just adds to the risk of managing debt.

As a person can tell by the things I listed, it is going to be very important for generations like mine to have an understanding of risk management, in both today’s markets and in the future. Unfortunately, if farmers or ranchers don’t learn some of the risk management tools that are available, it will become challenging for their farms to remain profitable. As I have mentioned in my previous blogs, I strongly believe agriculture has a bright future as long as we remain working hard and managing the risks and challenges that face agriculture in the future!