Job One for farmers is to manage many risks at once

Two telephone calls recently brought home to me the outrageous risks of farming and the plight of farmers trying to hedge against perennial dangers.

Both calls were from hog farmers, but thousands of producers in all sectors face similar challenges.

One told me about his lender yanking his hedging line of credit this summer, right when financial risk management was most needed. His line of credit had been established to cover margin calls that suddenly appeared, which is common in a time of commodity volatility, and losing it made him feel anxious.

He doesn’t know why the bank pulled the line, but it seemed to make no sense to him in a time when risk management was key to keeping his loans from the bank protected, which is something the bank wanted.

“It was like the left hand and right hand of the bank were fighting with each other,” he said.

Another caller told me he thinks hog farmers in his area will just give up and quit the business now that the federal government has made it clear it will provide virtually no extra aid to the industry to help it through the present crisis.

“Why go on and keep losing money? People can’t take this,” he said.

I recently co-wrote a special report on the plight of the hog industry, and the question I most wanted to answer was: why does the hog industry seem uniquely given to financial crises?

I’ve been doing this job long enough to remember the 1998 meltdown, the 2008 financial collapse, the H1N1 nightmare and the present drought-induced feedgrain price spike.

But the answer I got from economists surprised me. They felt the hog industry had recently suffered a string of calamities, but that all sectors of farming appear to be equally vulnerable. The hog industry has simply been unlucky.

Rather than make me blasé about the hog industry, it made me anxious about the state of the other farming sectors. There seems to be no other business that has the same number of risks.

Farmers have to hedge against:

  • Financial risk: farmers need to protect themselves against the price of the commodity they produce falling or the inputs they buy rising. This is not always easy or possible, but it is a yearly risk.
  • Production risk: whether it’s weather for crop producers or disease for livestock producers, Mother Nature can wield a baseball bat that can be difficult to duck.
  • Industry-specific risk: Disasters such as the BSE border closure for cattle producers are hard to insure against and difficult to survive if the affected industry is your main source of income.
  • General farm sector risk: There are entire decades when farms seldom make money. Careful management doesn’t necessarily cover that situation.

Forms of hedging and insurance exist for all these risks.

Operating mixed farms seems to offer some protection, with eastern Canadian mixed hog and grain farms and U.S. Midwest mixed farms presently doing better than the Prairies’ specialized hog-only operations. Prairie mixed farms are doing better, too.

However, the terrible riskiness of farming comes from the fact that at times farmers face all of them in quick succession or all at once. That’s been the plight of hog farmers.

The crisis in the hog industry is probably something most grain farmers aren’t thinking much about, but it’s a good primer on what can happen when everything goes wrong at once.

How ready are you?