Success StoryRisk management to protect working capital and profitability



Risk management to protect working capital and profitability

Author: Todd Davis

Planning Unit: Agr Economics

Major Program: Ag Marketing

Outcome: Initial Outcome

This program builds on the risk management workshops delivered in Spring 2016. An applied research program that simulates farm-level yield and price risk is incorporated into the educational program to illustrate better and educate farmers on how risk tools can be used to preserve working capital during multiple-year periods of low prices. 


Many young farmers are frustrated that risk management tools do not fully compensate when there is low yields or low prices. This educational program helps farmers, lenders, and Extension agents consider the multiple-year benefits of using risk management. The advantage of not going deeper into debt, selling grain during low prices, or reducing cash reserves is illustrated through case studies. Managers can quantify the improvement in profitability, an increase in cash reserves, and the lower debt levels over five years. This learning-by-doing process simplifies difficult concepts while engaging the audience in the subject. 


 Five workshops were conducted across Western Kentucky to help young farmers, established farmers, lenders, and crop insurance agents understand how to combine price risk management tools, farm bill payments, and crop insurance into a portfolio risk protection against lower price or lower yield.  A decision spreadsheet was given to producers to help farmers customize a risk management plan for their farm operation. Farmer evaluations indicate that farmers appreciated a hands-on approach to learning risk management tools in a market environment of tight profitability margins and limited working capital. 






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