Time to play defence?
Sometimes, it’s the risk you don’t see coming that can hurt you the most.
Consider what’s been happening over the past 18 or 24 months with crop prices. Because of a combination of strong global demand, low carryover stocks, the impact of biofuels and the slumping U.S. dollar, prices for Canada’s key crops have rarely been higher than over the past year or two.
Notwithstanding challenges facing our livestock sector, things have indeed been looking good for those who grow cereals and oilseeds.
RBC Royal Bank takes the long view. When markets are challenging for our clients, we are confident that things will eventually turn in a more favourable direction. When everything seems to be ideal, we still spend time assessing risk.
Even though crop prices are high, farming might actually be riskier today than it was two years ago. Because of volatility in the market, making just one or two big mistakes per year can have a severe impact on production results and financial outcomes.
There are several factors that support this notion. One is that input prices have increased almost as fast as crop prices, and in some cases faster. Another is that one of Canadian agriculture’s biggest expenses – petroleum – has been at record highs in 2008. The exchange rate between the Canadian and U.S. dollars is a further source of unwelcome volatility. Finally, unusual weather patterns have made some farmers less confident that the crop yields they expect will actually materialize.
Global demand for grains and oilseeds seems strong and genuine. Still, volatility in grain markets makes some producers wonder whether crop prices are forming a bubble that could burst. Consider these income protection ideas.
Many in the crop sectors are expecting good commodity prices for the next two years. People are starting to look ahead and price-protect some of their production.
We at RBC Royal Bank advocate a similar vigilance with respect to expenses. If a rise in interest rates would increase your expenses, consider managing that risk by locking in some term debt at today’s rates. Consider exploring with your input suppliers how to protect yourself against potential price increases.
If a rise in the Canadian dollar to significantly above par would boost some of your costs, you can hedge against this possibility. Programs like AgriInvest and crop insurance can also provide a measure of protection.
Taken together, these strategies and others can allow crop producers to benefit from today’s strong prices, while playing sound defence, too.
On behalf of RBC Royal Bank, all the best for farm and family this season.
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