The stock market is not the only investment that has fallen in value during 2008 - the agricultural commodities markets have, too. Many agricultural producers across the United States are feeling the pinch from falling commodity prices. Because of the current downturn in these markets, it has become more important than ever for agricultural producers to manage their price risks. Commodity prices have paralleled the stock market downturn. Prices have been influenced less by the usual interplay between commodities (e.g., the price of corn often has an effect on the price of beef) and more by the overall state of the economy.
Exactly how much have commodity prices dropped relative to the stock market over the 14 months since October 2007? Depicted in Table 1 are the largest observed drops from highs over the last 14 months for the Dow Jones Industrial Average, grains and cattle. The table shows that the prices of wheat and corn have dropped more than the Dow Jones on a percentage basis. On the other hand, cattle prices - while significantly off their highs - have not fallen as much as grain prices or the overall stock market.
These price decreases have obviously adversely affected the bottom line of agricultural producers in recent months. This, in turn, has caused many people to wonder if the economy, grain and cattle prices will continue to suffer over the coming months. Thinking about these questions and their ramifications has probably caused many sleepless nights. Agricultural producers, however, are fortunate to have several options to help them minimize their exposure to commodity price risk. To help you get some sleep at night, here are five risk management tools that can be used to protect against price risk.
1. Forward Contract
Contact a local cooperative or individual interested in establishing a price today for future delivery of a produced commodity.
2. Hedge Using the Futures Market
Use a broker to hedge a produced commodity.
3. Purchase and Option
Purchase a put or call for a specific commodity through a broker.
4. Crop Insurance
Work with an insurance agent to insure production levels and/or prices.
5. United States Department of Agriculture (USDA) Risk Management Agency (RMA) Programs
Contact an insurance agent to participate in one of the many programs RMA offers. Several different options for protection for both production and price for livestock and grains are available.
We could see prices go higher in 2009, but some analysts think we still have not seen the bottom of the market. It is always wise to do what you can to "lock in" a satisfactory profit for your operation. While some of these tools may work better than others in your particular situation, they are all potential risk reducing tools. If you are unfamiliar with any of these tools and would like more information, you can call the Noble Research Institute at (580) 223-5810 or visit with your local extension agent. More intense management brings more opportunities for success during turbulent times.