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MAFES Offers Risk Management Advice
By Rebekah Ray
MISSISSIPPI STATE -- Historically plagued by Mother Nature and the whims of consumer demand, today's agricultural producers have more opportunities to receive advice on managing their risks and producing a profitable crop.
Through the years, farmers have contended with weather, insects, crop diseases, financial challenges, overseas competition, changes in government regulations and a variety of other obstacles that increase the risk of farming. Yet despite these risks, producers are doing a better job than ever at supplying the food and fiber for our civilization.
"There is much talk today of a farm crisis, and although agricultural production has generally been plagued with various crises, today's situation is certainly financially distressful for producers," said Barry Barnett, agricultural economist with the Mississippi Agricultural and Forestry Experiment Station.
Barnett said in the past, the federal government eased situations for producers to help them stay in business. During the low prices of 1998 and 1999, the government subsidized farm incomes through emergency legislation. In 1999, farmers across the country received the highest farm subsidy ever of $22.5 billion.
"There have always been farm crises. The farm crisis of the early 1980s had different causes from today's," Barnett said. "The total number of U.S. harvested acres has remained relatively constant over the past two decades. Within the U.S., there have been periodic shifts in acreage across crops. Outside the U.S., acreage has increased for some crops."
The last three years have been good production years, and increases in food production have outpaced increases in market demand, leading to increased stockpiles of agricultural products.
With agricultural production up and demand not keeping pace, American producers are struggling to survive these risky times. Risks cannot be eliminated, but they can be managed. The benefits of following a risk management program include more effective strategic planning, better cost control, minimized losses, better decision-making and better use of resources.
"The livelihood of agricultural producers depends on making well-calculated decisions that will help ensure the long-term financial viability of a farm business enterprise. Good risk management techniques can help," Barnett said.
Risk management consists of a number of complex and interrelated decisions seeking to identify opportunities as well as avoid problems.
Effective procedures include production strategies like installing irrigation equipment, planting transgenic seeds, diversifying crops, practicing forward-pricing, purchasing insurance to cover losses, rotating crops, taking marginal lands out of production, eliminating unnecessary tillage operations, practicing good pest and diseases resistance management, and planting proven and tested seed varieties.
Keith Coble, MAFES ag economist, said financial management techniques include maintaining capital reserves, renting out sections of land, developing good marketing strategies, investment planning, and evaluating machinery and labor needs.
"Farming is inherently risky. There is usually a trade-off between risk reduction and profit. To set up appropriate risk management strategies, producers need to evaluate new risk tools as they come along," Coble said.
In late winter, the MSU Extension Service sponsored Risk Management 2000, a teleconference to inform producers of risk management techniques. Broadcast simultaneously at six locations around Mississippi, the teleconference included several MSU researchers, including MAFES ag economist John Lee.
"One approach to reducing financial risk is to use some of the 1999 government disaster payments to pay down farm debts carried over from the previous year. Some producers may consider renting their land out for a year or two. This provides income, eliminates the need for borrowing production money and frees farm equipment for contract work," Lee said.
Lee said producers should consider stretching out terms of loans, redoing the loan, or negotiating deferral of the principal payments and making a payment only on the interest.
The current farm crisis has been blamed on a myriad of problems, but the basic problems are low prices for grain, oilseed and cotton caused by global production, and stocks growing faster than consumption. Other factors include three years of good weather worldwide, increased South American competition, weaker exports and trade barriers.
While farmers are suffering from low prices, consumers have access to plentiful supplies of food, with less of their income going for food than at any time in modern history.
The agricultural crisis seems to go unnoticed in a humming national economy. Less than 2 percent of the country's population lives on farms, and agricultural production accounts for only a percent or two of the nation's gross domestic product.
In these challenging times, practicing smart risk management techniques can help producers survive and prosper. For more information on managing risks, log onto www.agecon.msstate.edu/risk. Risk Management 2000 is located at www.ext.msstate.edu/special/risk2000.
Contact: Dr. Barry Barnett, (662) 325-0848