The Importance of Risk Management

One of the best ways to be proactive in approaching opportunities for profitable pricing in 2017 is to consider risk management options. The Sorghum Checkoff met with John Miller, owner of Southwest Agribusiness Counsulting located in Caldwell, Texas, to discuss what risk management can do for producers.

Risk management refers to a pre-arranged plan to utilize market information and lock in profitable prices. Risk management plans help producers secure a price to sell their crop before they even harvest.

"We feel there is more risk in doing nothing than in making profit-oriented decisions utilizing sound risk management principles," John Miller said. "With a volatile market, profitable opportunities come and go quickly."

For producers specifically in a region like South Texas, where there is high unpredictability in weather and crop production, risk management can be key to success. Risk management plans are a way to be proactive in the marketplace by protecting high prices on paper when it may be too risky to sell cash commodities.

Yet many producers are wary to lock themselves into a risk management plan. There is a certain amount of risk a producer must assume when entering into a risk management plan since they are unsure of how their crop will harvest or how the market will change over time.

"A challenge is the difficulty associated with predicting input costs six or even eight months before planting," Miller said. "However, we begin working with our producers to develop price targets as much as a year in advance."

The first step to starting a risk management plan is doing the research. Producers should understand the way their market is moving and know the cost of their product. If a producer feels uncomfortable with this information or is unsure of how to interpret it, they should seek guidance from a consulting firm.

There are numerous firms in the market today to help producers understand and start risk management plans. Firms like Southwest Agribusiness Consulting help producers from initial assessments to securing contracts in the process of creating a risk management plan.

"We help producers find the right elevator, access cross-country buyers and brokers, use a trading account to reduce reliance on cash markets, build storage to better manage harvest and selling opportunities as well as vertically integrate," Miller said. "Our producers can concentrate more intently on their business knowing we are monitoring commodity markets with their best interests in mind."

To start a risk management plan, you need to understand your input costs. Good bookkeeping skills will help you gage how much you can afford to spend in preparation and how much you need to make in production in order to break even or profit. Find a risk management or marketing plan that you are comfortable with. You should know the details of your market, production, and finances in order to make a thoughtful, educated decision on how to protect your crop in the marketplace. Risk will come with any risk management plan that you create because there will always be uncertainty. Risk comes if you don't harvest as you anticipated, if you don't meet the target market specifications, or if the costs are higher than you planned. To help manage your risk, a conservative approach is best. This means picking the plan that best suits your needs and will lock in the opportunity for you to make a profit with as little risk on loss as possible.  

Risk management plans can be a great tool to help producers remain profitable within a market that is constantly changing. These plans can be used throughout any region and with any crop. A successful plan will rest on four fundamentals: know your cost, be comfortable with your plan, be aware of any risk, and use a conservative approach.