Corn+Soybean Digest

Remove Some of Next Year’s Risk


It’s that time of year now when you sit down and wrap up the current year and plan next year’s business path. December is frequently as busy or busier for a producer than spring and fall.

When most people think of year-end planning, the first thing that comes to mind is tax reduction. We all know farmers hate to pay taxes. Even if at times it might be better to pay taxes, that’s not normally the route most people take. Let’s get as many deductions as we possibly can.

Many of these deductions make a lot of sense. By the time you read this, a vast majority of you have prepaid a lot of expenses for next year. While it again makes a lot of sense to prepay these expenses in years when most of you have just experienced your best financial year in history, it also makes a lot of sense to plan past Jan. 1.

Risk management is one of the most important aspects of farming. Many people learned that the hard way in 2008 by buying all their inputs high and selling none of their production. Cycles repeat themselves and this cycle will not be any different. The key is did we learn anything from the last cycle, or the next time around will we once again say, “But this time it will be different.” Most cycle turns are a little different – but the results are almost always the same.

There’s another risk-management school of thought that a producer should remove as much or all of the risk from his operation as possible. This is extremely popular among lenders, and in some highly leveraged operations it makes sense. But most advice given to take all the risk out of your operation is typically given by someone who’s never run his own business.

The reality is, if you take all the risk out of your operation, you also take the majority of the profit potential out. No producer has ever made a lot of money farming by making a little profit every year. The big profits come in years like we just witnessed. And more importantly, risk management should employ means to avoid disaster years like some experienced in 2008.

With that said, how should this year be approached? My answer is relatively simple but it’s also a question that’s difficult to answer for everyone. All producers have a different balance sheet and a different financial risk-tolerance level.

But in general, if a producer has the majority of his inputs covered for this coming spring at price levels above $6/bu. corn and above $12/bu. soybeans, then I fall into the camp that a lot of the risk should be taken off the table.

Almost everyone has an opportunity as I write this article to once again lock in one of the most profitable years in history. During our business careers, we’ve all seen what we thought was going to be an extremely profitable year slip through our fingers because we locked in one side of the equation and not the other.

As I said earlier, I do not necessarily believe in locking in both sides at the same time. But when you have the kind of profit opportunities available right now, it’s not a prudent business decision to gamble on the whole thing.

Have a happy new year.

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