Taking risks OK, but prepare for the next downturn

The energy sector has had to adapt to the new reality of crude oil prices in the range of $50 a barrel, when the assumed norm used to be the $100 range.

What will agriculture do to adapt if and when the price range for canola becomes $7 to $9 a bushel rather than the $10 to $12 producers have come to expect?

Grain prices have been relatively strong for much of the last decade. Rapidly escalating land values have been a testament to the re-turns being generated.

There are ways to get into financial difficulty even with buoyant economic conditions, but a great deal of farm equity has been generated since the turnaround in grain prices that occurred around 2008.

Good profits have generated higher land rents, and most producers have made substantial investments in new machinery. Those who have been bold with land purchases and expansion have done well, but some highly leveraged operations would struggle if grain prices tumbled.

When grain prices are strong, crop insurance does a good job of mitigating production risk, and that’s the case for the current growing season. However, if market prices were to plummet, crop insurance coverage for the subsequent growing season would reflect that new reality.

Crop insurance is production insurance. Revenue insurance is supposed to come through the much maligned AgriStability program, from which producers have opted out in droves.

At this point, no one seems to have any idea whether AgriStability will be revamped or replaced in the next agricultural policy framework agreement. When grain prices are good, not much thought goes into farm safety nets.

In fairness, revenue protection programs, no matter how they are designed, will offer only short-term help. Government programs can’t and shouldn’t guarantee ongoing profitability in the event of a prolonged grain price downturn.

While no one can predict the future, it’s probably naive to think that grain prices will always be this strong relative to production costs. Many analysts thought crude oil could never drop to $50 a barrel and stay there.

It would seem equally naive to think that a world grain glut couldn’t cut grain prices by a third or even by half for a prolonged time period.

That would cause all sorts of economic pain, and there would be calls for government assistance. The time for governments and producers to design a realistic and workable farm safety net is in advance of the next downturn rather than during the downturn.

For their part, producers should understand the limitations of what government can and should do to support farm revenue, and they should take measures to ensure their own economic viability.

Timing is everything in agriculture. If you’re always cautious and guarding against the next economic downturn, it’s difficult to expand. If you aggressively expand and overspend, you can be among the first casualties of a downturn.

The story about an expanding world population and an increasingly affluent middle class buying all the food we can grow is getting rather old. It’s been repeated endlessly at farm conferences for years.

This isn’t a prediction of impending doom. Grain prices aren’t showing signs of crashing any time soon, but good times and sizable profits don’t typically last forever.

Hope for the best, but don’t count on it.

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