Reassess Your Risk

1 Sep 2016

By Marcia Zarley Taylor
DTN Executive Editor

NASHVILLE (DTN) -- Weathering the turbulence in commodity markets is a real threat to the nation's start-up farms. Often they possess the lowest equity and are still building credit histories. That means three years of tumbling farm incomes and a 38% drop in corn revenue since 2012 are taking a toll.

So when Farm Credit Mid-America filled a ballroom with young farmers under the age of 35 in Nashville this week to talk about financial risks, it was the experience of veteran crop producers that gave attendees encouragement. The advice from farming veterans included the following.

ASSESS YOUR ATTITUDE TOWARD RISK

"It's part of the game of farming, but are you psychologically fit for it?" asked Andrew Fansler, a 37-year-old, first-generation farmer who now crops 5,000 acres near Shelbyville, Indiana. If you can manage risks right, you can turn the odds of farming in your favor, he added, but be prepared to get over the humps and valleys that characterize the industry.

Last April, when cash corn was selling for about $3.60, Fansler's broker prodded him to buy Dec $4.20 calls for 12 cents. It wasn't likely to trigger, but it didn't cost much. (The advantage was when Dec corn rallied in June to as high as $4.49, he was in good position to sell his cash corn, knowing that his calls would participate in any gain above $4.20, DTN analyst Todd Hultman confirms.)

"Having those calls in place meant I didn't have to worry about prices gaining another 30 cents. They took the emotion out of the sale," Fansler said. "Courage calls" had a small cost, limited risk, and helped with a very practical difficulty that all farmers have of selling their grain when things look bullish.

IDENTIFY THE MOST DAMAGING THREATS, NOT JUST THE OBVIOUS ONES

"Lack of health insurance and liability coverage can wreck you faster than lack of crop insurance," stressed Steve Wordley, a fifth-generation farmer from Hampshire, Tennessee. Last year, Wordley suddenly couldn't catch his breath. He was diagnosed with multiple myeloma, a bone marrow cancer that recently has benefitted from break-through drugs. While he's in remission now, his therapy would cost $500 a day, if he weren't insured. "I'd be gone without it," he said.

Similarly, the risk of on-road accidents from trucking enterprises can be fatal to under- or uninsured businesses. "Do you realize the average settlement cost is $4.4 million for a death?" said Wordley. "If your liability insurance doesn't cover it, you better be able to write a check."

PREPARE FOR A PARTNER'S EXIT

Buy-sell agreements signed at the formation of a multi-partner business eliminate the tension when unexpected events like death, divorce, disability or abrupt career changes happen. Sometimes partners just want out. Guidelines for how to assess values and whether payments can be made in installments really need to be made in writing before a crisis hits -- and plans shared with everyone involved.

"One spring my brother was diagnosed with non-Hodgkin's lymphoma. It was supposed to be curable but he died by summer," Wordley said. "We had a plan, but it wasn't on paper and it hadn't been shared with his wife." The bottom line was it suddenly put Wordley $1 million in debt and took 15 years to work out.

LOOK FOR ALTERNATIVES WHEN COMMODITIES HIT A RUT

Fansler didn't come from a farm, but started farming at 14. In college, he remembers selling corn for $1.50 or $1.60. "It helped me look for new markets," he said. Many people look to cut their seed corn or fertilizer to stay profitable.

"I ask how I can get an extra nickel or dime," he said. "I look for crops that offer more opportunity." In his case, that's been non-GMO soybeans for export, seed soybeans and white corn.

At least one other audience member took their advice to heart. "You can't afford to insure against every risk in agriculture," he said, but he underestimated how much damage dicamba drift could do to one acre of a newly planted peach orchard. His neighbor has sued for $500,000 in damages.

"I didn't have liability coverage then, but I do now," he said. "And I don't spray anywhere near peaches."

Marcia Taylor can be reached at Marcia.taylor@dtn.com

Follow her on Twitter @MarciaZTaylor

(CZ/)