Risky timesManaging volatility is crucial in ag today.
By: Jonathan Knutson, Agweek
FARGO, N.D. — Risk can be scary. But risk, properly measured and managed, can benefit agricultural producers, a North Dakota State University ag economist says.
“We have lots of risk out there,” says William Wilson. “It’s not going to go away. For the next six to 10 years, we’re going to continue to have volatility like we’ve had for the last five or six years.”
Because it can’t be avoided, the key is being “compensated for risk,” he says.
Wilson spoke Jan. 21 at the 20th annual Crop Insurance Conference. The event, sponsored by the NDSU Extension Service, drew 230 people, most of them involved with crop insurance.
Rapid changes in agriculture are having a huge impact on exports, marketing opportunities and risk, Wilson says.
He equates risk with volatility, or changes in prices. He notes that commodity prices today can fluctuate more in a few minutes than they once fluctuated in an entire year.
The volatility is being driven by demand for food that’s growing faster than the growth in food production. Skyrocketing Chinese demand for U.S. soybeans and the use of corn for ethanol have pushed up demand, while growth in ag productivity has slowed from 3.5 percent in the 1960s to 1.5 percent in 2010, he says.
To manage risk properly, ag producers first need to measure it, Wilson says.
Once measured, risk can be managed with the use of tools such as contracting, hedging, crop insurance and storage.
“In fact, storage is one of the biggest businesses going now in agriculture,” he says.
Crop selection also is important in managing risk. Wilson urged farmers to “grow crops that are less risky than others and/or crops that have better risk management alternatives than others.”