A volatile economic environment necessitates strict financial management

A volatile economic environment necessitates strict financial management

Farmers are in a pickle as they prepare to harvest the 2022 crop and start making plans for 2023 because of high production costs, rising loan rates, and erratic commodity markets.

According to the University of Tennessee Associate Professor and Extension Economist Aaron Smith, a large portion of the problem is caused by factors outside farmers' control.

According to Smith, supply chain problems, a lack of workers, inflation, and high energy prices continue to impact input pricing. "Russia's invasion of Ukraine increased the price of diesel and fertilizer."

He said that other expenditures, like urea, had slightly decreased. Nonetheless, there is still a lot of market instability and uncertainty, and input costs are likely to stay high through 2023.

The weather may make matters worse. The possibility of an active hurricane season in the Gulf of Mexico "may swiftly intensify problems in the petroleum and fertilizer markets," Smith said.

He advises producers to seek out strategies for reducing risk while maintaining the possibility of profit.

We've been discussing reducing some of the risks when buying inputs at county meetings, Smith added. Strive to stay away from being margin-squeezed.

Although costs have decreased somewhat, he claimed that fertilizer prices are still very high compared to former years. "Consider how many bushels of sales you want to price to reduce the danger of input purchases. Commodity prices will also be a factor, but efforts will be made to minimize risk. The key is to avoid having to sell goods at reduced prices after having to pay high input costs. It serves as an input hedge to avoid severe margin pressure. He continues by saying that how producers approach price risk management may depend on when they buy inputs.

Increases in interest rates

The short-term end of low-interest rates will factor in these rising costs.

Smith added that while the Federal Reserve raises interest rates to combat 40-year high inflation, "cost of capital is a growing worry for producers." The combination of high-interest rates and expensive inputs in 2023 could provide a significant challenge for producers regarding access to and the cost of finance. Producers should speak with lenders as soon as possible to go over funding alternatives for 2023. Examine what makes sense.

Increases in interest rates

He says most manufacturers can access intermediate and long-term finance with fixed interest rates. Yet, managing loans with changing interest rates may be problematic.

Look for ways to make significant operating capital reductions for 2023, advised Smith. Variable interest rates pose rate hike risks. For certain manufacturers, obtaining a fixed-rate loan to cover operating expenses could reduce rising interest rates.

The various funding options should all be considered. For example, input suppliers may be able to issue operating loans. Producers must do the math to determine the least expensive option for securing financing in 2023.

Unstable markets

Budgeting for 2023 is a complex problem because of the uncertainty of expenses and markets. Smith advised producers to take into account the possibility of declining commodities markets. Since early June, crop prices have significantly decreased, according to Smith. "Wheat futures, for instance, have dropped to levels from before the Russia-Ukraine war.

As a result of better weather predictions, estimates for U.S. and global production have increased over the past two months. However, a large portion of the decline in commodity prices is attributable to factors other than agricultural production, such as concerns about the economy and the recession, a strong dollar index at its highest level since 2002, and other factors that will hinder exports.

The prices of cotton, corn, and soybeans, he claimed, have fallen. The price decline has reduced producer margins or made them hostile, which has a detrimental impact on those producers who did not take advantage of price protection in May and June.

Smith claimed that crop insurance premiums provide some absolute protection. Future forecast crop insurance rates for maize ($5.90), cotton ($1.03), and soybeans ($14.33) "give a base level of protection that exceeds current futures market offerings," according to the report.

Ruthless marketing tactics

Looking ahead to 2023 and 2024, he said that producers would want to be more aggressive with their marketing. Smith adds that there is still uncertainty about crop production in 2022, so markets will be volatile.

"Producers must assess their pricing in light of predicted production, storage capacity, and prospective price-protective marketing methods" (up or down). In these unsettling times, commodity markets will likely exhibit volatility.

"Producers should consider 2023 and 2024 marketing opportunities they are comfortable with. The commodity markets are experiencing massive movements. Learn how to use marketing tools or contact an experienced broker. We wish to be a little more aggressive than usual about the market's time horizon. Opportunities go rapidly if producers act slowly.

Managing techniques

Smith claimed that management has to take a close look as well. "Assess the cost of production. Always consider each farm and each field to identify where inputs are most cost-effective.

He claimed that making cuts could be risky and result in a loss of output and revenue. Producers must find the fields where they may justify making a little yield-sacrificing cut.

He continues that it's critical to adhere to certain fundamental beliefs in uncertain times. Test the soil. The pH values in the ground. The fertility of pastures can be increased at a reasonable cost by adjusting pH.

"These kinds of management techniques are crucial in complex markets. Maximize the use of costly inputs. Know which fields provide the best input results. Consider the resources at your disposal.

According to Smith, access to some nutrients can be restricted. Other options, such as poultry litter, could close some gaps. Poultry litter is a suitable choice when used in conjunction with commercial fertilizers. Find out where to buy it and where to use it most effectively.

According to Smith, producers' managerial abilities are tested by a shaky economy, fluctuating markets, and high production costs. The chances of navigating the turbulent economic environment will be increased by keeping an eye on prices, searching for advantageous pricing options, establishing financing arrangements sooner than usual, and utilizing both short- and long-term marketing opportunities.

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