Posted On: February 21, 2023 by Prevail Bank in: Business
How Farmers Can Mitigate Risk
There are several risk factors to consider outside of production alone to produce a flourishing farming business. These areas include but are not limited to production risk, price or market risk, financial risk, institutional risk, and human risk. Preparing for the unknown through proper risk management of these areas mentioned is something every farmer should consider. The farming landscape is ever-changing, and limiting uncertainties through risk management planning is helpful to your success.
Agricultural & Commercial Lender Ben Hertel discusses two areas to consider that will help mitigate your risk and ensure the success of your farm.
- Inflation Risk
- Marketing and Risk Management
Inflation Risk
Inflation continues to be a talking point throughout the industry with rising input costs and interest rates. Inflation can lead to cash flow problems due to decreasing profitability and purchasing power, which increases debts and decreases net worth.
By keeping an eye on the factors that can drive margin compression and mitigating them, you can maintain margins even as the inflation of agriculture inputs continue to increase. Historically, high commodity prices have led to higher business expenses, which happened in 2022. 2023 is projected to be another strong year from an income standpoint and various operational expenses have shown limited to no relief. Areas of inflation to stay aware of, now and in the future, are increasing input expenses, the potential increase in the minimum wage, the push for maintaining lower prices for the consumer, interest rates, and the rising cost of new and used machinery.
Marketing and Risk Management
With commodity prices projected to remain elevated in 2023, effective risk management will help ensure the success of your farm this year. Don’t fall for the “what ifs” and end up on the wrong end of pricing volatility. Prices can drop just as fast as they can rise. Prepare for all possibilities through risk management efforts.
With generally higher current commodity pricing, contracting salable crops remains a strong play. Locking in a good portion of your salable crop excess for market sales will help ensure you carry a profit through 2023. Crop insurance as a way of protecting your investments as we head into an unpredictable planting season is beneficial to maximizing profits while limiting risk.
As your farm expenses remain elevated, prepaying for input expenses to take advantage of discounts becomes more instrumental. Other areas to focus on to increase profitability with better prices are paying down your operating loans, improving equipment and real estate, and staying on top of management practices to continue building efficiencies. With heightened prices, producers tend to relax on management but should continue to sharpen these practices to maximize profits for a better future.
Planning Ahead
Our Prevail Bank Commercial Lenders will help guide you along your financial journey and help you plan to ensure the success of your business. Contact a Lender today!
Meet the Lender
Ben has been in the banking and commercial lending industry for since 2015. He has been at Prevail Bank since Oct 2019 and serves as a Commercial and Agricultural Lender in our Marshfield, Medford, Owen, and Phillips locations. Ben enjoys being part of a business owner’s financial management team and assisting them along their journey. Involved in the local Marshfield community, he is a 2021 graduate of Leadership Marshfield through Marshfield Area Chamber of Commerce & Industry.
