Volatile is a commonly used word to describe agricultural milk and grain prices. The definition of volatile is stated to be “liable to change rapidly and unpredictably, especially for the worse”. The ebbs and flows of the Class III milk price over the last 20 years is a perfect example of this definition. The lowest Class III milk price during the last two decades occurred in 2002 with an average price of $10.42. Compare this to the highest Class III milk price which occurred in 2014 at $22.34. In 2020 alone, monthly average Class III milk price has experienced swings from $17.05 beginning of the year, dropping to $12.14 in May, and rebounding to $24.54 in July. If 2020 has taught us anything, it is that we need to expect and be prepared for the unexpected. In our current world, so much is out of our control so it will be critical to help our producers control the risks that they can.
In 2021, controlling margins will be a key to success going forward. If you have not started conversations regarding what commodity price risk our farmers are taking off the table for 2021, start today. Now more than ever, it is important for our
farmers to know and understand their cost of production. Market volatility can present opportunities to lock in profits over the cost of production. Using programs such as MPP, DRP, forward contracts, or hedging strategies with a commodity broker to take some income risk off the table is likely prudent given the unknowns in the markets today. Disciplined and intentional marketing strategies will play a key role in ensuring long-term viability for our farm customers.
Because of the rebound in commodity prices in the second half of 2020, along with PPP, CFAP, CFAP 2.0 and WHIP government programs healing or enhancing balance sheets, do your farms have a false sense of security? In addition to addressing price volatility with a solid marketing plan, the most effective way to prepare for the unknown is to maintain balance sheet liquidity. When times are good, and there’s money in the checkbook, complacency can set in. It is important that we are working with our farm customers to ensure that there is a focus on maintaining balance sheet cushion as it is very possible market volatility will continue.
Many people have difficulty dealing with change and uncertainty, and 2020 has brought an unprecedented amount of both. Market volatility is one element of change and uncertainty that can be causing stress on our farmers but is not the only thing. When listening to a farmer do you ever hear a voice of uncertainty? This is a common sign of a person going through mental strain. What can we do as bankers to assist our farmers with stress and mental health? What do you as a banker do to stay mentally and physically strong, and how can this help a farmer cope with their stress? These are daily questions that we all deal with. One of the most important things we can do for our farmers is to actively listen to them. We can be trusted advisors with our financial and analytical acumen, but now more than ever, the human element and relationships we have are critically important.
As a banker I have worn several different hats over the last 20 years. At times I am viewed as a trusted advisor, cheerleader, coach, and psychologist, and often simultaneously. Regardless of what hat I am wearing, I emphasize to my farmers that no matter what is happening in the checkbook or their perceived stress, they must always continue to believe in themselves and their farms.