12 Steps for Managing Risk
To manage risk going into 2023 and beyond, there are several steps you can take.
1.????Stay focused, and don’t get complacent. Most poor financial decisions are made in good economic times, which can mask management shortfalls.
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2.????Plan for volatility. Commodity markets can reset overnight, while retraction of expenses often takes years. With all the variables producers endure, things rarely go as planned in agriculture. Consider testing your projections with a 10/10/4 shock – 10% drop in revenue, 10% increase in expenses and 4% increase in variable interest costs.
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3.????Know your production costs and break-even numbers. For some, $5 corn may not be profitable in 2023.
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4.????Build and protect working capital – the first line of defense in a downturn and a great shock absorber for the volatility we know occurs in ag. Make sure you have enough liquidity to cover debt repayment, living expenses and equipment depreciation.
5.????Know your overall interest rate risk. Many producers have “fixed” rates on term debt that will reset to new and likely much higher rates in the future.
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6.????Lock in input costs when it makes financial sense – and avoid unwanted surprises caused by supply chain issues and availability.
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7.????Be reasonable about profit expectations. The $300-$400/acre returns we saw in 2022 may not be realistic in 2023. As the old saying goes, “Pigs get fat; hogs get slaughtered.”
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8.????Give considerable thought to investment decisions and capital purchases. If you need a tractor, buy one (if you can find one). But remember, assets purchased during good times are often paid for in not so good times.
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9.????Separate needs from wants. If the deal’s not right, pass.
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10.?Know your true family living expenses. It can be tempting to mask and lump family living costs into farm expenses.
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11.?Improve your management and financial skills. Remember your competitors for growth have significantly improved their management and financial skill sets.
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12.?Maintain transparent communication with your lender. Good ag lenders realize agriculture is a cyclical business and won’t bail early if you have mutual trust and respect.