Dairy Today – The year ahead may not be another record breaker for crop profits like 2012, but no question, 2013 still looks to be a good year for profits for producers who can pull the marketing and buying trigger when margins present themselves.
This is true both on the sales and input side. Here are five hot trends and strategies savvy producers are making good use of:
- Become a True Profit Hedger.
Increasing numbers of progressive farmers are taking a lesson from the books of successful grain and other agribusiness companies: Don’t be exposed. That means to lock in inputs, such as fertilizer and seed, plus lock in commodity prices, at the same time. That’s called locking in a true profit margin, leaving nothing for guesswork. More farmers are doing this, true hedging, and more will be doing so in 2013.
- Be Risk Adverse.
Managing risk doesn’t stop with crop insurance and forward price selling. Despite low interest rates, you want to be in a strong cash position, a minimum of 33% working capital to revenue, experts say, and two months’ worth of expenses in the bank, CDs, money market accounts, investments readily convertible to cash. This not only protects you from any downturn, it also gives you cash to take advantage of great asset deals when agriculture undergoes a correction.
- Think Global.
Four international hot spots in 2013 will have a lot to do with your profits, and you need to keep your eye on all of them.
- Corn and soybean crops in Brazil and Argentina this winter. If crops there are less than ideal, prices could sail sky high.
- How far Chinese economic growth tumbles—or rebounds—and what impact that has on meat use, and all importantly, oilseed and grain imports.
- Whether Europe can resolve its debt problems.
- What kind of a production year the Black Sea region has particularly Ukraine and Russia, both likely to plant a lot more of everything to take advantage or rising prices.
- Manage Volatility.
Price volatility, true, is not going away, but volatility goes far beyond that. For instance, new corn and soybean growing regions in the U.S. are extending into north and west, areas with highly volatile weather and production one year to the next, and this has not been factored into a lot of models.
Furthermore, crop growing regions globally are expanding into areas with highly volatile weather one year to the next, too. As a businessperson, this means huge fluctuations in your profits from year to year that you need to be prepared for. For example, if weather is great around the globe next year, corn could be $4-something at harvest, if terrible; it could be $8-something.
- Cheap Money.
Eventually, the U.S. economy will turn around and when it does, look out interest rates. As a result, lock in as much of your interest rates in fixed rate middle and long term instruments as possible, with the absolute minimum in short-term variable rates. The good news on rates, however, is that you have a little time: rates in 2013 are likely to stay near current levels, that is to say, historically low. But when rates are 4% and 5%, half the long-term average, the pressure can only be up, so be advised.