Risk, Reward, and Opportunity
July 10, 2008
By Mark Kubesh, AgQuest Business Relationship Manager
As you know, production costs rose dramatically from 2007 to 2008. Recent conversations with those in the fertilizer and seed industries indicate that trend is going to continue in the 2009 crop year.
Commodity prices are currently just south of the recent record high levels and will need to remain high, at least by historical standards, to cover the record production costs that will be associated with the 2009 crop.
The producer dollars at risk today are much greater than they have been in the past. Along with that risk, however, comes very good profit potential if commodity prices stay at current levels.
In order to take advantage of the current markets and future pricing opportunities, it is imperative that each grower knows the true production costs for the 2009 crop. Input costs are rising right along with commodity prices, pushing production costs up from previous years. Breakevens are much higher than they have been in the past, and it is very important to be aware of your operation’s breakeven point.
Production cost increases will likely be covered by a number of methods:
- Increases in growers’ working capital as a result of profitable operations.
- Increases in growers’ overall equity position as a result of those profitable operations.
- Increased level of borrowed capital provided by lenders.
In many cases, it will take a combination of these three to meet capital needs for the 2009 crop.
The need for increasing capital amounts in agriculture is not limited to producers. Grain buyers and those hedging positions on the CBOT have also needed more cash to make margin calls in an upward trending and volatile market.
The bottom line: We will all be handling more dollars to produce the same crop.
At AgQuest, we are continually updating and upgrading our finance programs to fit the fast-changing needs of today’s agricultural producer. Please contact your AgQuest Business Relationship Manger to discuss your 2009 ag finance needs. We welcome the opportunity to better understand your operation, and to position ourselves to provide you with top-quality loan and risk management products to meet all of your financial needs.