Check out risk vs. reward on crop choices

Small profitability for most western Canadian crops and losses for others: that’s the bottom line outlook from Manitoba Agriculture’s farm management team.

It highlights the need for farmers to take their production and marketing math seriously in these times of narrow margins.

That’s especially true because the underlying risks in many of the crops are significant if the crop or market doesn’t work out.

Small divergences in narrow margin times can mean huge swings in profitability, offering the best and luckiest the chance to greatly increase their returns, while the poorest and unluckiest can see their losses skyrocket.

Right now, using general Manitoba assumptions, it looks like a good year in the Red River Valley with pinto beans, soybeans, corn and canola all looking solidly profitable based on today’s forward prices and yield expectations.

The outlook drops off after that with thin returns (over total costs including labour) for crops such as hard red spring wheat and sunflowers, while losses are expected for barley, flax and oats.

I’m not going to give you hard numbers here because the numbers in the Manitoba Agriculture guide are super-squishy, based on a host of assumptions that almost certainly don’t completely apply to your particular farm. Every farm has unique yield and production cost expectations, so every farm’s numbers need to be individually calculated. And these numbers are for Manitoba, including the Red River Valley, so Saskatchewan and Alberta conditions are likely to offer quite different expectations in some areas.

However, I would encourage you to go online and run your own expectations through calculators such as those offered by Manitoba Agriculture’s business and economics team, which does outstanding work.

One of the most important elements of their analysis is their detailed look at risk, as opposed to just a crude calculation of expected costs and profits.

They run “stress tests” to highlight what would happen if yields or prices fell, and compare expected returns to crop insurance coverage.

These are elements often overlooked because it demands the sort of risk-versus-reward that takes a bit of thinking and can cause headaches if you’re not of the mathy type.

However, including risk in your thinking is essential because risks are the torpedoes that can sink your ship. Every crop choice brings with it more than the simple possibility of likely profitability. It also brings with it a set of risks unique to each crop.

Crop insurance rates combine with input costs and market price to create a situation that can be starkly different from crop to crop.

Farmers need to know how risky versus rewardy their crops are before they invest in them.

“Know what they’re chasing. Know what they’re covered for. Know what they’re not covered for. Know these things as they are assessing all the risks and rewards of each crop that they’re thinking of growing,” Manitoba Agriculture’s Roy Arnott said to me, summing up what his crew is attempting with its ever-increasing focus on risk in crop production and marketing.

“We’re trying to monetize this risk and reward on a per bushel basis.”

Winter is the time a lot of farmers look hopefully at crops predicted to be profitable and peer anxiously at crops that are expected to lose money.

It’s also a time when farmers should be looking carefully at how much risk they are taking on with each crop choice because sometimes a decent reward looks a lot worse when you open your eyes to the risk.

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