4 Risk Management Strategies for Farmers

Oct 9, 2023

As farmers face tight margins in 2023, even small risks can have major consequences. Risk management strategies have always been important in operational planning, but this season and next, it’s especially so. 

In this article, we’ll walk through some risk management strategies farmers can implement to improve their odds of success in 2023 and beyond.

What risks do farmers face in 2023 and 2024?

Farm incomes are likely decreasing in 2023 from the previous year, erasing the gains made in 2022. Add to this the rising input costs, and farmers are facing a tight squeeze this year. 

It’s impossible to know at this point whether the 2024 season will be better or worse, but some key factors include

  • Corn and, to a less extent, soybeans seem to be trending downwards in price, back to pre-Covid levels—which means it’s not implausible to expect this trend to continue

  • USDA indicates that high input prices won’t ease, even into 2024

  • NOAA predicts mostly normal temperature or precipitation throughout much of the Midwest in the 2024 planting and growing seasons—which could improve crop yield compared to 2023

  • The 2023 Farm Bill is, as of now, still in flux, meaning there could be policy changes that impact farmers after its passage

The exact impact of each of these variables on farm margins and risk in 2023 and 2024 is, to say the least, complex. However, farmers should bank on external factors leading to less risk tolerance in their operations, not more.

As a result, farmers should prioritize risk management strategies now to avoid losing their shirts if the worst is to happen. 

What risks do farmers face in good times and bad?

In addition to the risks unique to the current and upcoming seasons, there are a number of risks that farmers face no matter the state of the broader market. These include:

  • Weather and climate patterns

  • Crop production yields

  • Commodity prices

  • Government policies (local, state, & federal)

  • Global market disruptions (e.g. Covid, Ukraine war) 

Any and all of these factors can cause wide swings in farm income and, more importantly, net profitability. These can fall into five general categories of risk that farmers must consider when putting together their risk management strategies. 

Production risk

Simply the process of producing crops or livestock exposes the farmer to risk. Weather, disease, pests, and other factors all play into production yields. 

Many farmers are using satellites and drones, Precision Ag, and highly targeted hybrids and crop protection to overcome these risks. These tactics maximize the value of every acre through careful use of resources. 

Price or market risk

Farm profitability is a precarious balance between commodity and input prices. Because both prices vary significantly from crop to crop, what farmers choose to plant has a major impact on their ability to manage risk. Price factors also determine a farmer’s decision to diversify and scale the operation. 

Financial risk

Farm financial cycles are inherently risky. Borrowing money and repaying debts—plus uncertainty about the farm’s financial prospects—is the source of many farmers’ sleepless nights. 

Institutional risk

Local, state, and federal policies have a sizable impact on farmers’ prospects. Tax laws, regulations for chemical use, rules for animal waste disposal, and support payment restrictions all impact the farm business. 

Human or personal risk

Whether pertaining to the farmer themselves or their employees, farming operations can be seriously hurt by personal challenges. Accidents, illness, death, and divorce can all open the business to risk, adding additional challenges to personal tragedies. 

4 risk management strategies for farmers

In the best of times, farmers are looking to mitigate risk and improve their farm profitability. In difficult times, this requirement is even more paramount. As such, here are four risk management strategies that farmers should consider adopting in 2023 and onward into 2024. 

1. Farm diversification

While many market & global trends are universal (consider Covid’s impact on the whole industry), many are limited to particular crops or livestock breeds. To mitigate against these risks, diversification is a powerful risk management strategy for farmers. 

Common diversification methods include:

  • Crop types

  • Crop-livestock mix

  • Endpoints or weights of the same crop

  • Land use (i.e. hunting vs. farming vs. energy)

  • Double cropping

The best approaches to diversification involve building multiple revenue streams that function simultaneously. Energy farming, for example, can take up little space on the land, but generate significant revenue for your operation. 

2. Farm & crop insurance

Nearly every crop farmer in the U.S. is enrolled in the USDA’s crop insurance program. This ensures that, when the unpredictable happens, the farmer is covered for prevented planting or lost acres.

However, crop insurance only covers one aspect of the operation: crops. If you’re going to protect all of your assets—and yes, they’re all exposed to risk—you need additional private insurance products. These include:

  • Dwelling or homeowners insurance

  • Equipment coverage

  • Structure coverage (e.g. grain bins, animal housing)

  • Farm products coverage—seed, crop protection, fertilizer, etc.

Don’t just assume that crop insurance will be sufficient to protect your operation from risk. Instead, take advantage of federal insurance programs, but fill the gaps with private insurance products. 

3. Contract production

For farmers who don’t want to manage all of the various administrative or business aspects of the operation, they can engage in contract production. This is when an agribusiness coordinates all aspects of a product from production to retail.

Under contract production, the agribusiness provides feed and other inputs to the producer. The producer then manages the operation and commits to a specific quality or quantity of the product. The producer is also responsible for managing yield risk with insurance and sound management practices.

There are pros and cons to contract production. The biggest pro: a favorable market for the farm output is guaranteed. However, producers are shielded from the upside, since the sales of the product is fixed by the contract. In other words: stability replaces potential rewards. 

4. New technologies

Technology has already changed the game when it comes to farm profitability. Precision Ag, for example, enables farmers to control the rate of application of crop inputs based on a number of factors. This reduces operating costs while improving yields—resulting in a better bottom line all around. 

Additionally, advancements in genetically altered seeds can help farmers provide resistance to certain herbicides, diseases, or insects. This, on the whole, helps farmers better manage crops and improve yields.

Final thoughts on risk management strategies for farmers

The better you can manage risk, the more likely you’ll be to thrive in an increasingly tight market. When you have risk management strategies in place, you can confidently plan for the future—and even consider expanding your operation. 

If you’re thinking about picking up new ground for 2024, now’s the time to start looking. Check local farmland lease listings on the CommonGround marketplace.