How producers can weather volatility

It’s important when managing volatility to first understand the risk, which producers can do by knowing the break-even price for whatever commodity they are producing. | File photo

The agriculture sector is usually characterized by volatility. But over the past decade, this has become much more pronounced.

Stakeholders have the challenge of constantly navigating a flood of information from around the globe. People have, at their fingertips, information about anything from weather to insect pressure to disease. That information is almost immediately priced into markets, causing them to swing higher or lower depending on the perception of the impact on supply or demand.

Canadian producers have mainly been experiencing commodity price volatility because 2019 was affected largely by tensions in the trade environment as well as adverse weather conditions throughout most of the year.

According to BMO Economics, composite yields this year are estimated around five percent below trend, largely as a result of weather.

When operating in a sector with ongoing volatility, producers must determine what level of risk exposure they personally, and their operation financially, can withstand. In our conversations, we provide the following advice to agriculture producers to help them weather volatility in their operations.

To help manage volatility, it’s important to, first, understand the risk. This is done by knowing the break-even price for whatever commodity is being produced. Without that knowledge, the risk exposure cannot be quantified.

From there, understand the impact to the overall operation if the commodity is sold below break-even prices.

The goal is to have sufficient working capital available to participate in the next production cycle — whether it’s seeding another crop or filling another pen of cattle. Sometimes, that just means limiting losses. Risk tolerance differs among individuals; once an acceptable level of risk is determined, look to implement a price risk management strategy. This might include insurance, futures or options, production contracts, or some combination of these tools.

With agricultural technology, producers can leverage data-driven farm management and robotics to improve on-farm productivity. Implementing technology can be advantageous for a sector that sees a fair bit of volatility. It allows producers to leverage data to understand the costs of their operation better. With precision agriculture, for example, technology can be applied to various aspects of the operation and producers can garner insights into overall business performance and look for ways to make improvements.

While sometimes capital intensive, ag technology can provide a data-driven approach to farm finances and provide more complete information on the operation.

The benefits of leaning on an external network of advisers — an accountant and banking partner — or tapping into resources that can help with weathering volatility, can often be overlooked.

On the network of advisers, it’s a good practice to meet with your banker or accountant regularly to come up with or assess the financial plan for your farm. This will help provide a broad look at where money is being spent on the farm; a better understanding of costs helps with understanding where money can be saved and, potentially, reallocated. The stronger the relationship farmers have with their advisers, the more the advisers will be able to help find solutions most likely to fit particular circumstances.

On resources, government programs, such as the AgriStability program, may be able to help. AgriStability can help manage risk and financial losses from things like margin declines caused by market fluctuations and trade disruptions.

While volatility in the agriculture sector is a constant, there are opportunities to help ensure stability in an operation and maximize profitability.

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