What carries greater downside risk: having to sell in a down market to generate cash flow, or pre-selling a crop in increments? The short answer is it depends, but the in-depth explanation is that panic or stressed sales by their nature are rarely the most profitable. Pre-selling some crop carries a risk, yes, but there are options for managing production risk.
Mark Lepp, founder, and CEO of FarmLink Marketing Solutions says that a marketing plan encompasses these kinds of risks and much more. When developing a plan, no matter what the commodity, Lepp says it’s important to look forward more than just one year and account for all crop or livestock types and their specific market dynamics, and then tie those dynamics back to the unique needs and wants of the farm.
Every farm will have a different risk tolerance level, and not all farms need cash at the same time of year. There’s also storage capacity or feed stores to consider.
The key, Lepp says, is to avoid selling under pressure, which is a very different strategy than trying to “hit the highs.” For one, a market high is only evident after the fact. Plus, Lepp says that by selling four to six times a year with a forward-looking approach, you can usually settle into the top-third of a market when it comes to prices.
A sound marketing plan involves sitting down and weighing both the upside and the downside risk of any commodity. When faced with cash flow pressure — which happens — it’s important to calculate the future value of any given commodity. Is there a crop with more upside potential? Or one with plenty of bearish news? Even if you traditionally have stored one crop instead of another, each year is different, and there may be some very profitable reasons for choosing to liquidate one crop over the other.
Using all the tools available to you is key, as well. Lepp understands the hesitancy that some have in hedging but says that often once farmers fully understand how a true hedge works, they become much more comfortable with the tool. Hedging is about managing losses, not managing a hedge fund.
Whether you’re working with an advisor or creating a marketing plan on your own, looking back and reviewing your decisions is really important. “That’s how we learn and get better,” Lepp says. You won’t always remember all the details of why you made a particular sale or decision, so be sure to keep solid notes to refer to later.
Hear more from Mark Lepp in conversation with Shaun Haney in this Mind Your Farm Business podcast:
Disclaimer: Royal Bank of Canada and its subsidiaries are not responsible for the information provided in this podcast, and this information does not necessarily reflect the views of Royal Bank of Canada or any of its subsidiaries. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its subsidiaries.
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