We all seem to be bombarded by the new farm economy every day. Turn on RFDTV, open up the latest issue of your favorite farm magazine (mine is Farm Futures), talk to your neighbors, and the reality hits you smack in the face. Everything screams negative crop margins, lower profitability, preserve working capital, and batten down the hatches for the next few years.
This reality hit me in the face at the latest Farm Futures Business Summit. The 2015 theme was Power Up Profits, and this year’s theme was Managing Through Tough Times. The 2015 summit covered preparing for turbulent times and the risk facing producers. The 2016 summit covered growth plans in tough times, positioning ourselves for success, and more topics too numerous to mention.
How are we to position ourselves for success in the economic reset? Dr. David Kohl had the biggest question of the meeting that we talk about daily on our farm; how do we exploit volatility? Exploiting volatility is where margins show themselves. It is simple to say that exploiting volatility will keep us profitable, but it is easier said than done.
Dad and I have historically talked about corn and soybean markets when we speak of volatility. In the past year, prices really haven’t been volatile, but only sideways or lower. Volatility doesn’t exist much as I write this post: we can see that in daily trading and also in cheap crop insurance premiums projected for 2016. Exploiting volatility short term in grain markets will most likely come from basis spikes.
Our latest talks have focused on cattle feeding market volatility. How can we exploit this? Our answer is to minimize it. Minimizing the volatility keeps us from making a lot of money and hitting home runs, but allows us to hit singles. We are discussing expanding our feedlot operations. Our idea is to not expand our feedlots on site, but expand our ownership of cattle via custom feeding. We are running a trial - we bought cattle, hedged them on the futures market 100%, and sent them to Kansas to be custom fed. The current corn prices are the same in Kansas, rates of gain are better due to drier weather, and slaughter basis is narrower than in Illinois.
Depending on cattle market changes, this may be a way we can exploit volatility and also expand our feeding operation.
How can you exploit volatility in your farm business?
The opinions of the author are not necessarily those of Farm Futures or Penton Agriculture.