Farming Is Risky Business
Sanford has been experiencing a lot of growth lately. New stores and services are popping up fast along Horner Boulevard. Over the next several years, many of these businesses will likely thrive, unfortunately some will likely fail. That is the nature of owning a small business. Risk is the probability of an unwanted event occurring, and owning a business is risky. The consumer wants and needs change with time and competition in the marketplace, all contribute to risk when running a small business. There is one business out there which is slightly less visible, but is perhaps the riskiest of all. Farming.
President John F. Kennedy once said, “The farmer is the only man in our economy who buys everything retail, sells everything at wholesale, and pays freight both ways.” It was a true statement then, and is a true statement today. There are many cost to raising a crop before the farmer receives a check. They must pay retail prices, which they cannot control, for all inputs, including seeds, fertilizers, and more, just to get the plant out of the ground. Additional inputs are made throughout the season to protect the crop from all the insects, weeds, and diseases that mother nature can throw at it. Then they must put the cost and labor into harvesting, and in some cases even processing the crop. Finally, they must pay freight, both ways, to haul the crop to a market. Finally, they will receive a check.
There is more to the story though. Crops, or commodities, are bought and traded on a market which determines their values. Prices can change rapidly, just like the Farstock prices shown each day in the paper or on the evening news. Droughts in key growing areas can cause prices to skyrocket, while favorable weather conditions may cause them to plummet. It means that when a seed is planted in the spring, after a farmer has already spent a pretty penny on input cost, he or she often has no idea what that final crop will be worth at harvest.
This is where risk management can come into play. Remember, risk is the probability of an unwanted event occurring. By watching and understanding the changing markets for crop commodities, a farmer can choose the best time to sell a crop. As crop prices rise and fall based on long term weather forecast and estimates of global supplies, among other factors, a farmer can sell his or her grain at a time when the price seems high, a practice called hedging. The risk is that the price may continue to rise, in which case a farmer loses potential profits, but if played right, the price will fall, in which case the farmer who hedged will make more than their neighbor who did not. This strategy does not remove all risk, but can help to mitigate risk.
You may be thinking, geez, it sounds like farmers need a degree in marketing. In fact, some farmers have exactly that. For everyone else though, there are workshops available and offered right here in Lee County to make sense out of all these marketing tricks. If you farm, you’ll want to mark your calendar. On Tuesday, January 24, 2017, Nick Lassiter with the North Carolina Department of Agriculture and Consumer Services Marketing Division will be here at the McSwain Center to go over some of the ins and outs of risk management. His workshop titled “Managing Price Volatility/Identifying Macro Indicators.” It will be offered from 4-6 p.m., and is free to attend. Just give me a call at 919-775-5624 for more information and to register.
It’s all part of being CEO of the family farm. Each day a farmer wears many hats, from mechanic, to scientist, and from accountant to stock broker, among many more. Many see farming as a part of the rural landscape and think little about the true business it has become. It’s time for all of us to take a moment to realize just how much work running the family farm really is.
Zack Taylor is the Agriculture Agent (Field Crops and Livestock) for North Carolina Cooperative Extension in Lee County.