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If the drought of 2012 did not bring American farmers into the public conscience outside of the ag community, then Dodge?s now famous ad during the Superbowl certainly did. Global populations are growing, and expanding middle classes in emerging economies have the means to eat more food. With the world?s best combination of good soil, technology and market signals, U.S. farmers will be increasingly counted on to meet the growing demand for commodities like grain and beef.
But even as responsibilities for farmers grow, business risks associated with weather, economics, politics and regulation persist. It?s for these reasons that risk management is taking on greater importance in the daily lives of food producers, and others who work in agribusiness.
Cargill AgHorizons is a firm plugged in to all aspects of the new ag economy, interacting with farmers and commodity markets to help the ag industry manage risk. The company?s business unit?president, David Baudler, is a frequent presenter on the topic. We caught up with him following his presentation in February at the 2013 USDA Ag Outlook forum in Washington to discuss his company, and the risks facing farmers today.
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What is the role of Cargill AgHorizons U.S.?
We are the farmer facing part of the business servicing 50,000 farmer customers from Colorado to Ohio and Minnesota to Tennessee and Texas. We provide products and services that help farmers buy, sell and market their grain and crop inputs. Our role in the supply chain is to store grain in times of surplus and provide them to markets in times of need.? We also move grain from areas of surplus to areas of deficits, both domestically and globally.
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You offer a variety of grain contracts to customers aimed at reducing risk. How do those differ from listed futures contracts at CME Group?
Our value proposition is to provide tools to the farmers that are easy to understand and allow them to make marketing decisions.? Some of those products like ProPricing, allow farmers to use our expertise in marketing their grain.? Other products allow them to use some of the components of the CME group to apply to their physical cash sales of grain, and participate in rising or falling markets before and after delivery.
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Cargill Ag Horizons also offers grain storage and crop insurance.? What changes have you seen from farmers over the past year with regard to these products?
Overall farmers have become much more sophisticated in the way they look at their total cost of running their business and how it relates to their grain marketing plan.? Grain storage is one way that they manage the timing of the basis sale of the physical grain that matches their marketing plan. We do offer ?bin? programs, that fund the construction of farmer owned bins and in turn they commit to future pricing and deliveries of physical grain.
Lastly, we have seen the use of crop insurance increase dramatically, which provides a production safety net protecting them from severe losses like some experienced this crop year. We believe that this component is important and the farmer cost of these programs can be tied to their marketing plan as well.
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How does Cargill use markets to manage risk?
Given our place in the supply chain, and managing our physical stocks at harvest time, we use the futures market to hedge our exposure. Flat priced purchases can be offset by sales in the futures market. This is a core practice in businesses like ours. How we do this varies relative to our physical stocks and production changes.
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We?re coming off a year with one of the worst droughts in memory. Have you seen that change risk tolerance in any way? Has it changed your approach?
Relative to our hedging practices, we maintain the same approach in managing our market risk. That said, with the extreme volatility that can be created in a short crop year, the way we manage our cash book and markets we serve varies dramatically.? For example, this year our portfolio has been much more directed to domestic consumption than export.? This has a big impact on our barge loading facilities vs. our domestic truck and rail markets.
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Outside of weather, where do you see the biggest market risks for farmers coming from in the next year?
We believe that allowing markets to work, without outside non-market driven influences, is key.? The reaction to this year?s drought has been the destruction of core demand, so as the farmer has enjoyed the price benefits of supply constriction, it does raise flags if we have a big worldwide production. This would especially be the case if land or rental costs are locked in using today?s grain values and we see price reversal as a result.
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Read More:
What Risk Management Means to Agriculture in 2013
Source: http://openmarkets.cmegroup.com/5322/ag-markets-outlook-qa-with-david-baudler-of-cargill-aghorizons
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