Getting Riskier

Getting Riskier. I'm Greg Martin with today's Line On Agriculture. Farming has always been a risky business - but today the risks are greater - and the way to manage those risks fewer. Market volatility has become a way of life in agriculture and according to Mike Boehlje - Ag Economist at Purdue University - many of the old ways of managing risk just don't work in today's farm economy. BOEHLJE: Even crop insurance at the traditional 70 to 75% level of coverage doesn't give you the same protection as it used to. It doesn't even cover the cost of inputs anymore with the rising fertilizer and seed and chemical prices. So all those traditional tools to manage the risk of a business by managing price cost yields and all of those things are much less effective than they used to be. So we've got increased volatility, a less effective operating risk toolkit which means we have to do more managing the risk of a business on the financial side. But here too Boehlje says there are risks - and often from factors out of the control of the producer. BOEHLJE: A 1 to 2% increase in interest rates can basically wipe out the cash reserves in terms of debt servicing for many farm businesses. It doesn't take a 3 or 4 or 5% increase in interest rates, a 1 to 2 can do it. That's why Boehlje is a strong advocate of the ACRE program. Some producers have been reluctant to sign up for ACRE because once you start in the program you have to stay in the program. Yet Boehlje says - even with this drawback - it's still a good way to manage risk. BOEHLJE: We got a study done of what's the cost of losing flexibility? And what that showed us that the cost of losing flexibility was only $9 an acre – actually 7 to $9 an acre so the chances of having something happen to you that made it a wrong decision to sign up were only what, 2 to 3 bushels of corn. Right? And so all of the downside protection that you get plus as I indicated the cost of quote – being wrong if I signed being relatively modest suggests to us that signing up for that program is a really, really important thing to do. ACRE payments are triggered by a combination of yield and price - so when state and individual farm yields are higher - lower prices are needed to trigger payments. From a grower's perspective - according to Purdue Ag Economist Dr. Chris Hurt - if crop prices are higher - losses for enrolling in the program are relatively low. But if crop prices are lower - the return is relatively high. Hurt says no one knows what crop prices are going to do - but if prices or yields are low - ACRE looks good. He recommends growers who have done little forward pricing and those who need downside price protection to especially consider the benefits ACRE can provide. That's today's Line On Agriculture. I'm Greg Martin on the Northwest Ag Information Network.