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Managing Risk in Crop Production

Managing Risk in Crop Production

Submitted by Craig Askim, Extension Agent, Agriculture and Natural Resources

Farming is a risk no matter how you look at it. With today’s high cost of production, producers need to look at ways to reduce risk when planting a crop. Basically, there are four major areas to examine where risk can be reduced on your operation. These areas are crop insurance, pricing strategies, crop selection, and land rent agreements.

When selecting crop insurance consider these three options:

1)     Choice of policy – There are many to pick from and many times you get want you pay for.

2)     Level of coverage – Many times what producers have is too low.

3)     Unit structure – There are many different options to examine.

Read the policies and determine whether the policy will meet the needs of your operation if a disaster occurs. Will the insurance cover your expenses and give you enough capital to plant next year’s crop? This amount changes every year.

Pricing strategies have three main areas to consider: pre-harvest, harvest delivery and sale, and post-harvest delivery and sale. Pre-harvest pricing is the marketing of a crop before it is harvested (forward contacting etc.). Harvest delivery is when you sell a crop at harvest, or a set period of time afterwards. Post-harvest is marketing at a later date based on many variables.

All of the options listed above can reduce risk. Producers should also take advantage of market prices throughout the year.

Crop selection is the best way to reduce risk. There are six factors to consider: diversification vs. specialization, soil types, planting/harvest window, machine/labor capacity, weather outlook, and price outlooks. These are large areas and many different strategies can be used to reduce risk in these areas. Therefore; determine which areas improvements can be made and be willing to change plans if weather or market prices change in a short period of time.

Land rent agreements – There are many different types of rental agreements made. However; when the agreement is written there are basically three core options to the agreement: fixed cash, flexible cash or share rental agreements. The amount of risk varies with each one.

Fixed cash is the simplest and most commonly used. It is simply paying a set fee per acre to farm X amount of acres. There is nothing wrong with this option but it may not be the best if a renter is looking for options to reduce risk.

Flexible cash agreements have two advantages. It reduces risk to the renter and could increase return to the land owner. Basically, there is a base payment and in good years landowners get paid more, usually a percentage over the base payment based on production.

Share Rent –Renter and landowner share risk equally. Usually this occurs when two parties are involved in the operation.

Risk is a fact of life in farming operations, but there are ways to manage it. The examples listed above are some of the ways to minimize risk. For greater details, go to the website: http://www.ag.ndsu.edu/farmmanagement. If you have questions call 873-5195 or email: craig.askim@ndsu.edu.

Until Next Time!

Source: Dwight Aakre, NDSU Farm Management Specialist, 701-231-7378 or Dwight.Aakre@ndsu.edu.

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