Risk Management Lessons Taught by Drought

Reflect and Move Forward

The 2012 drought across most of the United States’ major agricultural regions has taught farmers a lot about their businesses. The agriculture industry knows that it has changed a lot since the last major drought in 1988. The effects of this drought on farmers and the industry will be different, so the lessons that farmers can take away from the 2012 season will be unique, too.

I attended a recent round-table event in Lincoln, Neb., featuring ag risk, finance and market advisors from Water Street Solutions and Kent Thompson with Kruger Seeds. The panel members provided insight into the effects of the drought from a business perspective. Here are what I considered to be the top 3 lessons that farmers should take with them into 2013:

Tim Yohnka, a farmer in northeastern Illinois, gives perspective on the size of a crack in his family's cornfield. This region of Illinois was lucky enough to get early summer rains but still suffered yield loss.

Tim Yohnka, a farmer in northeastern Illinois, gives perspective on the size of a crack in his family's cornfield. This region of Illinois was lucky enough to get early summer rains but still suffered yield loss.

Lesson 1: Find the holes in your risk management plan. What parts of the operation are left out, what marketing decisions are exposed and where are the gaps in insurance coverage? While this year was an anomaly, farmers should work to fill in those holes because they never know when another anomaly will occur.

Within lesson one, the specialists with Water Street Solutions strongly recommended to only forward sell up to the amount of grain that is covered by the farm’s crop insurance policies. Forward-contracting grain can be a good marketing practice, but when farmers sell more bushels than what their crop insurance policy will cover, they expose themselves to the possibility of having to buy back with their own money the contracts that cannot be fulfilled. Some farmers who put themselves in that position this year may be draining their working capital or selling land to stay in business.

Lesson 2: Make input decisions based on multiple-year trends. Don’t drastically change how you match the best seed for your farms based on this past year.

Lesson 3: If you have a field with higher risk, consider additional insurance coverage. Total weather insurance is a supplemental policy on top of federal crop insurance. The additional insurance pays policyholders based on specific weather events, such as a single day’s daytime heat stress, nighttime heat stress and moisture level for the covered field’s exact location. The policies can be expensive, but they can mean a lot of value to farmers in years like 2012.

Kent Thompson believes that seed companies will have enough seed supply. The bigger challenge will be their management of inventory and getting the right hybrid in the right spot. Farmers may want to consider additional insurance policies like total weather on fields that aren’t seeded with the best hybrid for that particular location due to inventory issues.

What other business lessons can farmers impart from the 2012 season?

Heather Koehler works on the AdFarm public relations team. The only thing separating her from corn fields and cattle (for at least part of the day) is her office window.