We all measure risk—one way or another. Strategically is best
Effective risk management is key to surviving the boom and bust cycles of agriculture. With modern marketing strategies, farmers and ranchers have managed risk for decades. Many lock in inputs while simultaneously selling future crops. That’s one piece of the process of managing current price volatility.
Risk management is essential for our customers and for us.
Risk is inherent in agriculture. Risk, by itself, is not a bad thing. Without risk, of course, there’s no reward. Keep in mind that you will manage risk one way or the other. It’s far better to consciously manage risk. The qualifier is to plan for risk and to keep your exposure at an acceptable level.
To manage risk at MFA Incorporated, we have a specifically designated leadership group representing appropriate areas of the business. MFA faces a variety of risks from interest rates to weather to inventories, just to name a few.
We know that leveraging risk should be a fundamental part of every business plan. If you’ve watched companies rise or fall in recent years, you understand effective risk management is a competitive advantage whether in the boardroom or on the farm.
Those with well-thought-out risk management plans weathered the drought of 2012 better than those without. Crop insurance (another risk-management tool) went a long way toward offsetting the risk of weather.
But it doesn’t end there. The Kansas City Federal Reserve said it best: managing risk means sacrificing a portion of upside potential to protect against downside risk.
One traditional risk-management strategy in agriculture has been to maintain large reserves of working capital. That’s effective in dealing with market downturns and in lessening the risks associated with interest rates.
But that practice has a downside of its own—opportunity costs. If not done properly, it can limit future growth and necessary investment in land, facilities and equipment.
The depth and complexity of the risk-management process should reflect the magnitude of your risk profile and your personal preference in the level of risk with which you’re comfortable.
At MFA whether we’re looking at inventories, expansion opportunities, interest rates or pension-fund totals, we use a variety of metrics for different situations.
Take interest rates for example. We use a variety of sources of debt capital, some with fixed rates and staggered maturities and some with variable rates. We also monitor the yield curve, paying particular attention to intermediate and long-term rates. All of these help us manage interest rates.
The key for us at MFA is to have a plan in place and constantly evaluate that plan against changes in the marketplace. The plan is not static. It’s a continuous plan with a constant monitoring of risk.
Wild fluctuations in plant foods prices bit us several years ago. We now have appropriate risk-management strategies in place just for that situation. But inputs, as I’ve mentioned above, are just one part of the process.
Many people have mentioned that today’s agriculture shares a similarity to the 1970s. With that observation foremost in mind, we’re keeping a close eye on debt accumulation, cash flow and interest rates.
While those rates are low today, they won’t always be.
I’m reminded of what former MFA President Bud Frew observed in reflecting on economic swings in the 1970s and 1980s. He noted that what looked to be a very good investment at 4 percent interest looked awfully bad at 15 percent. There were very few years in between those rates.
If this country’s financial house is not put back in order soon, we face multiple risks outside of our individual control. That underscores the importance of risk management and financial triggers now.
I’m assuming our producers are putting a pencil, too, on land and equipment purchases to make certain of cash flow ability. On our end at MFA, we’re devoted to keeping a strong balance sheet.
Debt-to-asset ratio ranks near the top of the list.
I am a great believer of President Eisenhower’s approach to planning. “Plans are nothing. Planning is everything,” he said. And that’s the bottom line.
Economically, agriculture seems to be in new territory. Prices are high, farm income is good, interest rates are low. All of those are two-edged swords.
Planning is everything.
Bill Streeter is president and CEO of MFA Incorporated.