At a recent conference with producer and lenders, a large farm Chief Executive Officer (CEO) asked two questions which we quickly turned into an impromptu group exercise.
Both proving to be extremely interesting, the first of the two questions was, “What percent of my fellow producers in the room used a marketing and risk management plan, whether in the form of hedging, options or another measure?” Secondly, he asked, “What was your level of understanding of the marketing and risk management programs?”
For the group exercise, producers were asked to individually answer, on paper, from their own experience. Additionally, lenders were asked to make speculative answers based on their customers. Each participant submitted their answers in writing on a 1 to 10 scale (one representing poor understanding, ten representing excellent understanding).
Of the producers, 67 percent stated they used a marketing and risk management plan including one of more of the following: forward contracting, futures and options, or crop insurance. Approximately 33 percent stated they did not use any marketing and risk management plan.
It is important to note, however, some producers grew commodities or conducted business in regions where these programs were not applicable or available. For this question, the lenders estimated 85 percent of their clients used plans and 15 percent did not. In short, the lenders’ speculation regarding their customers was much more favorable than the answers directly from the producers.
Regarding the level of understanding of marketing and risk management programs, the producers’ answers varied widely. Approximately 44 percent indicated their level of understanding was under 3 (same range of 1 to 10).
One-third rated their understanding between 4 and 6, and 26 percent rated themselves above 6. The lenders’ view of program comprehension was surprising. The lenders estimated 27 percent of their producer customers have a mastery level under 3, 51 percent between 4 and 6 and 22 percent over 6. Seemingly, there may be some disconnect between producers and lenders regarding marketing and risk management skills.
In summary, this exercise highlights the need for education on marketing and risk management plans, for both producers and lenders.
Additionally, producers and lenders need to increase communication about this critical element of potential profitability. Challenges of the current economic reset require a plan to capture profit. This is particularly important for the younger generation of farmers with limited equity, and without liquidity to absorb financial shocks.
Regardless of age or type of operation, producers and lenders need to focus on profitability and sustainability. Education regarding disciplined marketing and risk management practices may be a key, missing piece to successfully navigating today’s economic environment.