In the Driver’s Seat: Four Farm Risk Management Principles
In this farm economy, it’s hard to feel like you have any power over the revenue side of your operation. But now more than ever, it’s crucial to take charge of decisions that drive profitability.
So we’re launching a five-part conversation series, “In the Driver’s Seat: Staying in Control of Your Grain Marketing.” We’ll cover four key principles for managing farm risk, and hopefully, give you strategies and encouragement for more successful grain marketing decisions.
In this first episode—an Introduction to Four Farm Risk Management Principles—we talk with two people at ADM who work day in and day out in grain marketing:
- Doug Roose, Director of ADM Producer Origination, who heads up the team of 10 local ADM representatives across the U.S.
- Nate Brabec, Western Integration Territory Manager, who works closely with producers across the Corn Belt.
Host: First of all, farmers may wonder what they can learn from a company that buys their grain. Are your interests really aligned?
Roose: There is a tremendous amount of overlap between what’s good for ADM and what’s good for the farmer. At the end of the day, we care about getting farmers the highest price they can possibly get for their grain. It’s the only way they’re going to stay in business and it’s the only way we can continue to buy from them. It’s not just a transaction today and tomorrow; it’s about building long-term working relationships.
Brabec: The beauty of what we do, because we’re trading grain with many market participants, is we can decide when and where to own or sell our different crops. We have enough volume and participants in corn and soybeans where, if a farmer needs to sell $4 corn, there may be somebody buying—whether it’s another grain company or cattle feeder or ethanol plant—that it still makes sense for their business and both parties can be profitable. That’s where I think [working together] is a huge opportunity.
Host: What all should a farmer include in his “risk management”?
Roose: Risk management is a term commonly thrown around, but every farmer defines risk differently. The key for us is understanding how each farmer feels. Is storing your grain risky? Is marketing ahead (by forward contracts) risky? It’s a personal definition that matters.
Brabec: I run across farmers all the time who are afraid to forward market. It’s too much risk for them. I run into others who feel the least risky thing is to store their own grain on their own farm in their own bins. Neither of them is right or wrong. It’s how they perceive risk and how comfortable they are with those different risks. Understanding that is imperative before we can do anything to help them manage what they deem as risk.
Host: What is the biggest challenge about managing farm risk in this economy?
Roose: The situation we’re facing now is that commodity prices are depressed more than they have been in five to seven years. But the thing that’s not changing is the potential for volatility. The opportunities to sell at levels that might be profitable are so much shorter. Something happens and you get an immediate price spike and it happens so fast it’s difficult to execute.
Brabec: Farmers have gotten really good at managing expenses, but as volatility has risen in markets, it requires them to work in an area where they haven’t spent much time, yet the impact can be huge. In Nebraska, we’ve had what we consider volatile costs in fertilizer, seed, chemicals. But if you looked at the history, it’s moved only $20 an acre on average. For that same farmer, on a 200-bushel yield, the market in 2017 alone on the December board moved .70 cents—that’s a $140 move on the marketing side. That’s an impact to their bottom line, but farmers don’t recognize it because it’s not where they like to spend their time.
Host: You’ve outlined four steps that farmers can use to get a better handle on these marketing-side risks. Could you walk through those?
Roose: I don’t know that there are four perfect ones, but these are four that resonate with me:
- Plan simply,
- Execute objectively,
- Adjust with discipline, and
- Evaluate honestly.
Those four principles, I think, are key to feeling good about the approach you take to marketing. It’s not a simple task. I think it takes people who can help you stay on track, and I think we’re in a good position to do that.
Host: Let’s start with planning. How can farmers keep their grain marketing plan simple, but cover those swings you referred to?
Brabec: As we work with producers to prepare a plan, it helps to identify what really matters to them. Maybe a farmer who’s first starting out or has a tighter situation, their decision might be different than somebody who, say, has built equity over the years and can withstand bigger market moves. As they build that plan, it helps them think through, “Where can we win and where can things go wrong?” And if it does, what are we going to do about it? Think it through on the front end, because the last thing you want to be doing is making tough decisions when you’re emotional.
Host: What goes into a good plan for the marketing year?
Brabec: Obviously the cost to grow the crop. Those things change, but not a lot. The big one is yield. As we go through the year, as weather changes, it starts to really impact yield, and that can have a large impact on net profit. So that’s where we try to build tools and use them to digest [data] automatically and rapidly, because a small change makes a big change to the rest of the balance sheet.
Roose: GrainBridge is one [software] tool we advocate, and it’s free to farmers. In a nutshell, GrainBridge gives them a clear, real-time look at their profit and loss in any market. If they have multiple things going on—grain in storage, contracts, a brokerage account, crop insurance, a change in yield—GrainBridge takes all of those things into account and gives you a real-time view of where you’re at from a gain-loss perspective. It’s a great decision tool and lets farmers be in the driver’s seat.
Host: So if a farmer knows what he needs to earn from his crop, what happens next? Talk about contracts that can help farmers execute objectively.
Roose: We offer lots of different contracts and we don’t know which ones will fit a farmer’s situation until we have that deeper discussion [of goals]. They’re very personalized to individual objectives. There are two major types. One kind is more automatic—like Price Daily, or Accumulator or ASP—that execute on parameters that we put in. To many growers it’s a big relief to know that those are making pricing decisions every day based on achieving their objectives. Other contracts are priced by expert grain marketers who analyze the market.
Host: Once a farmer lines up those contracts, when should a farmer change that plan? Talk about the principle of “adjusting with discipline.”
Roose: Adjusting the plan is something that most often takes place when the environment changes—if there are some fundamental shifts in the market, whether that be a supply and demand situation to a technical situation. That’s the time to re-evaluate whether the plan you have in place will achieve the objective you set out. I think changing contracts to achieve your objective is great. What we don’t want to do is change the objective.
Brabec: A lot of times, we get emotional and when we get emotional, it’s really tough to execute—and that’s where it really starts to have an agonizing effect. Having a plan in front of them, it’s easier for people sometimes to just ask the question, “We originally planned to do this. Why are we changing?” A lot of times that can help a farmer get back on track and execute, which is a key part of being successful.
Host: Finally, you talk about “evaluating objectively.” What do you mean by that?
Roose: In many cases, we don’t decide what we want to evaluate until we get to the end—and we’re hard on ourselves. Many times the benchmark becomes the high of the market, which is an impossible task unless you’re frankly really lucky. So evaluating your results honestly would include asking if you achieved your objectives. Those objectives might include:
- Achieving overall profitability;
- Reaching targets for price per bushel;
- Ending up in the top third of the market range; or
- Earning better than last year.
It’s helpful, as you plan, to think how you’re going to [realistically] evaluate your plan.
Brabec: I’ll take an example where a farmer forward contracts, and we have a crop problem like we did in the year 2012 where maybe they had to buy out of a contract. It’s easy to say, “Gosh I made a bad choice.” But we forget about the other years, where there was an opportunity and we decided not to sell. As farmers evaluate, they need to look at all those things and ask, “Am I being objective in my results?”
Host: If a farmer is in the driver’s seat, do you see ADM sitting beside him—being a navigator?
Roose: Every operation is different and has different levels of comfort. Some people would like us to have our hand on the wheel and do more; some people would prefer we don’t get anywhere near the driver’s seat. We accommodate any of those wishes and personal preferences.
Host: Doug, what’s your goal for this conversation series—and for your ADM team as a whole?
Roose: The goal we have is to be a shoulder they can lean on, a trusted partner. How do we make sure people know they’re in control of their business—in the driver’s seat—but give them the resources, insights, and expertise to plan and execute grain marketing better?
Subject to Terms and Conditions in ADM-provided contract. Please see contract for details. ADM is providing this communication for informational purposes, and it is not a solicitation or offer to purchase or sell commodities. The recommendations in this communication do not take into account any particular individual’s or company’s objectives or needs, which should be considered before engaging in any commodity transactions based on these recommendations. The sources for the information and recommendations in this communication are believed to be reliable, but ADM does not warrant or guarantee the accuracy of the information or recommendations. ADM or its affiliates may hold or take positions for their own accounts that are different from the positions recommended in this communication. The information and recommendations in this communication are subject to change without notice.
Subject to Terms and Conditions in ADM-provided contract. Please see contract for details.
ADM is providing this communication for informational purposes, and it is not a solicitation or offer to purchase or sell commodities. The recommendations in this communication do not take into account any particular individual’s or company’s objectives or needs, which should be considered before engaging in any commodity transactions based on these recommendations. The sources for the information and recommendations in this communication are believed to be reliable, but ADM does not warrant or guarantee the accuracy of the information or recommendations. ADM or its affiliates may hold or take positions for their own accounts that are different from the positions recommended in this communication. The information and recommendations in this communication are subject to change without notice.