>>> “The price of agricultural commodities over the long run will level out at the cost of production for the highest-cost producers.” – Neil Harl, emeritus professor of economics, Iowa State University gross dollars per head. “That number is critical in developing a marketing goal, which helps make marketing decisions easier,” Russell says. “All this is compiled into an eight-to 10-page risk management ‘bible’ that we provide to clients and lenders. It even includes crop insurance recommendations.” When it comes to assessing risk tolerance, Russell says it all comes down to two components: • What’s a farmer’s fi nancial ability to bear risk? “Some established farmers have stronger balance sheets and can handle a lot more price and market risk compared to someone younger and in more debt,” he says. • What’s a farmer’s psychological ability to bear risk? “Some farmers are reluctant to use futures and options because they don’t sleep well when they do,” he says. “We’ll help them learn, but we wouldn’t be good risk managers if we tried to force them to use tools they’re not comfortable with. “Our approach is to protect market downside so farmers don’t lose money — or go broke — and have the upside open to take advantage of market gains or cost decreases,” Russell says. “Good risk management means having good records, knowing breakevens and having good crop insurance, then coupling that with a sound marketing program.” STEPS TO MANAGE RISK 9 Determine fi nancial ability to bear risk based on balance sheet and income statement; then work with your lender. 1 2 3 4 5 6 7 8 9 Understand psychological ability to bear risk, including preferences for marketing tools such as futures, options, cash sales, etc. Develop next year’s operating plan, including term debt, operating expenses, profi t and depreciation. Calculate gross dollars per acre or per head needed to be profi table. For online risk assessment quizzes, check out these websites: • cdp.wisc.edu/pdf/participant_packet_D.pdf • humanmetrics.com/rot/rotqd.asp • extension.purdue.edu/extmedia/NCR/ NCR-406-W.html Develop a marketing plan. Document sales. Critique the plan at year-end. •• SEE MORE •• Watch a video at chsinc.com/c. Shock-test plans based on the worst year in the last 15 years. Decide what it takes to survive the worst year. Source: Russell Consulting Group 10 November/December 2012 CHSINC.COM