Prairie Grains Jan.-Feb. 98 - Managing Market Transition

Issue 11
Jan./Feb. 1998
Old Tools, New Tools Needed
to Manage the Market Transition

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Prairie Grains is the
official publication of
the Minnesota
Association of
Wheat Growers,
North Dakota Grain
Growers Association,
South Dakota Wheat,
Inc., and the
Minnesota Barley
Growers Association.

"The new farm bill is written for the good manager. It is a threat to those who resist change. In fact, it could be fatal. But for those who can adapt, there will be opportunities."
So said Barry Flinchbaugh, Kansas State University extension ag economist, the keynote speaker at the recent Minnesota Wheat and Barley Growers Convention in Grand Forks, N.D. Flinchbaugh's address was sponsored by Farm Credit Services.
Flinchbaugh said there is a bright future in farming, "but only for those who are creative, innovative, and able to harness change." They must also learn to manage risk.
The old farm program assisted poor managers more than good managers, because the government managed part of the risk. "Well, Uncle Sam has died. He no longer is going to be managing your risk. If we can learn to manage the markets like we did farm programs, then we can excell."
Still, for many farmers, Flinchbaugh sees no push to change. There is a mindset that "if the price goes down, we'll amend the bill," which may or may not happen. So far, it appears that by and large the market transition is working, as U.S. ag exports are close to a $60 billion record. Continued future demand looks promising, as there is a growing global population, and improving per capita income. But world markets must stay open.
"The challenge collectively is to manage the politics. Don't let it circumvent the markets. That's where associations like the MAWG and MBGA have a role," he said. It is a myth that farmers are "political eunuchs" with no political power, he said. "I find exactly the opposite. We ended up with a farm bill that cost more that the old one. Now did eunuchs get that done, or people with political power?"
Flinchbaugh said that while farmers should manage their politics collectively, individually, they need to manage risk.
One way is through more contracted production. Flinchbaugh pointed out that wheat and feedgrains have the lowest contract integration of major U.S. farm.
CONTRACT INTEGRATION

Wheat and feed grains have the lowest contract integration of major U.S. farm commodities, according to Kansas State University ag economist, Barry Flichbaugh. Contracting, he says, is one tool to consider in managing the market transition.

"Some may think it will ruin the family farm. I would argue that it will save the family farm," he said. Flinchbaugh said his grandfather used production contracts, so they are not a new concept. In fact, all farmers have produced under contract already - in the past, with the federal government.
"That's not unlike corporate contracts. The question we need to answer now is who are we going to contract with, and who internationally, and how," he said, adding that biotechnology is going to demand more orderly, segmented, identity-preserved markets. "Contracting gives quality control."
With more integration, 21st Century Agriculture could be called "the partnership era," he said. "We need an alliance of producers, banks, USDA, agribusiness, and universities to get innovative and creative to manage risk," said Flinchbaugh.
Records and farm enterprise analysis is another area in need of better management. "Half of U.S. farms don't know their costs. How are you going to be successful if you don't know your costs? You're whipped before you start," said Flinchbaugh. "Some farmers keep cows even though they're unprofitable. Then put that enterprise in your entertainment budget, not as an enterprise."
Knowing your costs is essential to a professional business. "Nothing makes me more angry when a farmer says, 'I'm just a farmer.' Do you know any other profession that requires the skills of farmers? We're not just farmers. We're professional producers of food."
Flinchbaugh is chair of the "Commission on 21st Century Production Agriculture," established in the 1996 Farm Bill. The 11-member Commission is scheduled to have a progress report of the new farm bill completed by June 1, 1998. A subsequent report will be due by Jan. 1, 2001, which will spell out what direction U.S. farm policy should take after 2002, when the farm bill expires.
"I have no doubt there will be a future in agriculture," said Flinchbaugh. " But the old coffee shop adage, 'we've never done it that way before' needs to be replaced with 'let's try it, and see if it works.'"
Risk Management Tools

Kansas State University Extension Ag Economist Barry Flinchbaugh says crop producers need to relearn the old risk management tools, and learn new ones.

Records/enterprise analysis: Know your costs!
Hedge or use futures markets
Forward contract sales
Spread sales out over the year or across years
Reduce costs and debt/Increase savings and equity
Produce commodities with less variable yields, production, prices and income
Diversify production
Integrate ownership
Purchase crop and/or revenue insurance
Add value beyond the farmgate
Form market alliances/closed co-ops
Use market information and analysis
Increase education

Copyright Prairie
Grains Magazine January 1998

Issue 11 Jan./Feb. 1998	Old Tools, New Tools Needed to Manage the Market Transition

Library Home E-Mail Back Prairie Grains is the official publication of the Minnesota Association of Wheat Growers, North Dakota Grain Growers Association, South Dakota Wheat, Inc., and the Minnesota Barley Growers Association.	"The new farm bill is written for the good manager. It is a threat to those who resist change. In fact, it could be fatal. But for those who can adapt, there will be opportunities." So said Barry Flinchbaugh, Kansas State University extension ag economist, the keynote speaker at the recent Minnesota Wheat and Barley Growers Convention in Grand Forks, N.D. Flinchbaugh's address was sponsored by Farm Credit Services. Flinchbaugh said there is a bright future in farming, "but only for those who are creative, innovative, and able to harness change." They must also learn to manage risk. The old farm program assisted poor managers more than good managers, because the government managed part of the risk. "Well, Uncle Sam has died. He no longer is going to be managing your risk. If we can learn to manage the markets like we did farm programs, then we can excell." Still, for many farmers, Flinchbaugh sees no push to change. There is a mindset that "if the price goes down, we'll amend the bill," which may or may not happen. So far, it appears that by and large the market transition is working, as U.S. ag exports are close to a $60 billion record. Continued future demand looks promising, as there is a growing global population, and improving per capita income. But world markets must stay open. "The challenge collectively is to manage the politics. Don't let it circumvent the markets. That's where associations like the MAWG and MBGA have a role," he said. It is a myth that farmers are "political eunuchs" with no political power, he said. "I find exactly the opposite. We ended up with a farm bill that cost more that the old one. Now did eunuchs get that done, or people with political power?" Flinchbaugh said that while farmers should manage their politics collectively, individually, they need to manage risk. One way is through more contracted production. Flinchbaugh pointed out that wheat and feedgrains have the lowest contract integration of major U.S. farm. CONTRACT INTEGRATION Wheat and feed grains have the lowest contract integration of major U.S. farm commodities, according to Kansas State University ag economist, Barry Flichbaugh. Contracting, he says, is one tool to consider in managing the market transition. "Some may think it will ruin the family farm. I would argue that it will save the family farm," he said. Flinchbaugh said his grandfather used production contracts, so they are not a new concept. In fact, all farmers have produced under contract already - in the past, with the federal government. "That's not unlike corporate contracts. The question we need to answer now is who are we going to contract with, and who internationally, and how," he said, adding that biotechnology is going to demand more orderly, segmented, identity-preserved markets. "Contracting gives quality control." With more integration, 21st Century Agriculture could be called "the partnership era," he said. "We need an alliance of producers, banks, USDA, agribusiness, and universities to get innovative and creative to manage risk," said Flinchbaugh. Records and farm enterprise analysis is another area in need of better management. "Half of U.S. farms don't know their costs. How are you going to be successful if you don't know your costs? You're whipped before you start," said Flinchbaugh. "Some farmers keep cows even though they're unprofitable. Then put that enterprise in your entertainment budget, not as an enterprise." Knowing your costs is essential to a professional business. "Nothing makes me more angry when a farmer says, 'I'm just a farmer.' Do you know any other profession that requires the skills of farmers? We're not just farmers. We're professional producers of food." Flinchbaugh is chair of the "Commission on 21st Century Production Agriculture," established in the 1996 Farm Bill. The 11-member Commission is scheduled to have a progress report of the new farm bill completed by June 1, 1998. A subsequent report will be due by Jan. 1, 2001, which will spell out what direction U.S. farm policy should take after 2002, when the farm bill expires. "I have no doubt there will be a future in agriculture," said Flinchbaugh. " But the old coffee shop adage, 'we've never done it that way before' needs to be replaced with 'let's try it, and see if it works.'" Risk Management Tools Kansas State University Extension Ag Economist Barry Flinchbaugh says crop producers need to relearn the old risk management tools, and learn new ones. Records/enterprise analysis: Know your costs! Hedge or use futures markets Forward contract sales Spread sales out over the year or across years Reduce costs and debt/Increase savings and equity Produce commodities with less variable yields, production, prices and income Diversify production Integrate ownership Purchase crop and/or revenue insurance Add value beyond the farmgate Form market alliances/closed co-ops Use market information and analysis Increase education
Copyright Prairie Grains Magazine January 1998

Old Tools, New Tools Needed to Manage the Market Transition

CONTRACT INTEGRATION

Risk Management Tools

Old Tools, New Tools Needed
to Manage the Market Transition