The Difference Between Profits and Losses

Posted on 03/09/2017 10:23 AM

Farming like any other business is filled with peaks, valleys and potholes along the way. In fact farming may have a few extra problems that many businesses don't have to deal with. All businesses have the common goal, profits. All businesses have another common thread which is the cost of production.

In a simple manufacturing business it's relatively easy to assign costs. Cost to manufacture, rent, labor, freight and a couple of miscellaneous cost. Once the model is set there are not many changes as long as the business can find customers, deliver product, manage receivables, payables and inventory they are all set and ready to make money.

Farming has the same business model with a few exceptions. Once the farmer has put their business plan together, determined their crops, figured out costs they are set and ready to go. However the farmer doesn't have the same certainty that everything will go as planned or scheduled. Farming has the additional problems of weather, to wet or to dry and many other potential problems that can arise from planting to harvest.

With all of the potential problems that farming can create farmers can do things to protect them and alleviate the unforeseen problems that come their way. After working diligently setting up the business plan, setting realistic goals, watching the amount of debt they take on, farmers can actually insure against the future problems by learning to hedge their goods and services properly.

Hedging which started in the 1800's has come a long way and now offers the farmer the ability to turn hedging into another potential profit center that not only will protect their business but potentially create a better yield on money. Learning and understanding these methods are like any other are as important as farming itself.

With all of the new technology that helps farmers work better, faster and enhance per acre yield the hedging model has created more opportunities as well. No longer should farmers settle for the futures price on their hedge and hope that everything works well and they don't oversell and under produce forcing them to get squeezed themselves. The art and business of hedging can now lock in desirable prices without capping gains allowing profits to grow while protecting adverse risk.

The time is now to educate yourself on the business of proper hedging and take the advantages of catching the next big move knowing the downside is protected. It's time to have your protection model catch up with the rest of your business after all you use the best technology everywhere else, why not use it to make more money?

Keep those stops tight.

The views, opinions and positions expressed by the author are theirs alone and do not necessarily reflect the views, opinions or positions of Pro Farmer.

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