Risk management tools a must

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An unsettled national and world economy in combination with other factors have more than doubled the amount of money at risk for U.S. agricultural producers, says a University of Illinois agricultural economist.

“Last year, both production costs and commodity prices doubled and then plunged,” notes Nick Paulson, an assistant professor in the Department of Agricultural and Consumer Economics, farmdoc team member, and an affiliate of the University of Illinois Center for Economic and Financial Education.

Despite the recent decline, both prices and input cost is still well above long-term averages for corn, soybeans and wheat.

This means, he adds, that farmers “have twice as much money at risk due to higher volatility in the market.” That means sound risk management practices are more important than ever.

Paulson points out that the agricultural economic sector faces a different set of challenges than those associated with the national and world economies.

The ag economy is certainly affected but not necessarily in the same way, he explains. The overall economic challenge being highly cited for the broad economy is the availability or lack of credit.

“The biggest challenge for the agricultural sector is the run-up in both production cost and commodity prices followed by their sharp coinciding with the recession in the general economy. The combination of these events has led to interesting and challenging positions for input suppliers, grain handlers and producers in terms of tight margins,” Paulson says.

An additional problem facing producers is that government programs that once provided a safety net have been undermined by market volatility.

These programs are based on price levels that are now basically irrelevant, he says. “Programs no longer guarantee breakeven prices or even prices close to breakeven for producers.”

It will become increasingly important in this volatile environment, he noted, to lock in input costs when they are favorable. “With price volatility, it is crucial to control to whatever extent possible the costs of production,” he concludes.

Source: University of Illinois



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