Dry conditions and excessive moisture: Why risk management is important
FCC Ag Economics’ sector-specific Economic Snapshot series forecast a healthy Canadian agriculture sector into 2018. The series provides a broad overview however, saying nothing about individual producer margins, which will vary from the national average – sometimes significantly.
2017 growing conditions to-date have challenged regional production. There’s still significant uncertainty around yields according to AAFC’s August 2017 outlook for principal field crops. Dry conditions in Western Canada and excessive moisture conditions in Eastern Canada have reduced projections of overall crop production by 2.7%. The dry weather this year has also exacted a toll on livestock producers’ forage production and pasture conditions.
Weather’s impact on margins expected to be high in 2017
It’s possible some producers will experience a yield loss as much as 20% below provincial 5-year averages in the current year. With market conditions currently soft, the added pressure of lower production will push weather-challenged producers’ profit margins to near the break-even point (based on average costs of production and yields from the 2017 Saskatchewan Crop Planning Guide and the Ontario Field Crop Budgets). Nobody wants to be in that situation, but if you’ve been there before, you know the importance of risk management strategies.
Risk management and marketing decisions can make the difference in a tough year
The money’s already been spent to grow the 2017 crop.
It’s now up to savvy marketing to get you the best price on crop not already locked up through forward pricing, future and option contracts. It’s not unusual for spot prices to vary 15% or more in a crop year; sound marketing helps mitigate the impact of that price risk on the bottom line.
Risk management isn’t easy – but it is essential
Include all likely sources of risk to assess what you need to protect your profitability. Revenue insurance can guard against both production and price volatility, but if harvest doesn’t bring you the expected volumes, crop insurance can mitigate production risk from either low yields or poor quality. It pays to invest the time and effort to properly evaluate all possible scenarios and assess how the different tools will work on your own operation.
But you manage risk year-round, long before each crop year begins. It’s now time to familiarize yourself with private insurance tools and the Canadian Agricultural Partnership (CAP). Canada’s latest agricultural policy framework, will introduce a few modifications to the 2018 business risk management programs.
Leigh joined FCC in 2015 as a Senior Agricultural Economist, specializing in monitoring and analyzing FCC’s portfolio, industry health, and providing industry risk analysis. Prior to FCC, he worked in the policy branch of the Saskatchewan Ministry of Agriculture. He holds a Master of Agricultural Economics degree from the University of Saskatchewan.