Like any portfolio of investments, a farmer’s crop mix is a combination of risk-versus-reward decisions.
But that’s not something every farmer thinks about when considering their cropping choices. Most of the attention and interest goes into the projected bottom line profit or loss generated by harvesting average yields, not what happens if there is a market or production disaster.
Realizing the risk is less fun to ponder but the most important part of hedging.
It’s one thing to swing free acres into a crop that promises a good return, but different crops bring different possible financial risks, and the likely most-profitable crops aren’t necessarily the safest from loss if something goes wrong.
Read Also
Critical growing season is ahead for soybeans
What the weather turns out to be in the United States is going to have a significant impact on Canadian producers’ prices
That’s a reality the folks at Manitoba Agriculture’s farm management branch have tried to address in their annual analysis of likely costs and profitability of crops.
Their Guidelines for Estimating Crop Production Costs 2017 contains useful measures of likely yields over break-even yields, and AgriInsurance coverage over operating costs.
They are useful calculations and good reminders that insurance coverage plays an important and often-neglected factor in assessing a crop’s risk.
If somebody is new to a crop like corn and is unsure about what yield they can reasonably expect while easing into it, understanding how well their production costs are insured is valuable.
The analysis also offers a profitability scenario if prices dropped 10 percent and yields dropped five percent. Those are pretty modest downside assumptions.
Every farmer has different costs, likely yields and crop-growing abilities, so profitability scenarios will be different for every farm. But looking at relative risk versus potential reward is always a good idea.
Farmers can (and do) come up with lots of their own calculations of outcomes for various scenarios. What happens if prices drop by 50 percent? What if they get cut off from crucial markets and can’t deliver for months. (Think of BSE and the 2013-14 grain transportation crisis.)
What happens when interest rates surge?
Inside the Manitoba crop production costs and profitability report, the “what if?” scenario with lower yield and prices is described as a “sensitivity analysis,” — a common way of describing various scenarios in financial analyses.
You might remember the “stress tests” placed on American and European banks after the 2008 financial meltdown, in which banks had to prove they could survive various scenarios to avoid heavy financial burdens being placed upon them by regulators.
Average yields and today’s forward prices might provide the main bottom line projections most farmers are looking at now, but it’s well worth a farmer’s time to analyze several scenarios and see how attractive those crops would be if things got really bad or really good.
