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What Risk Management Means to Agriculture in 2013

Feb 25, 2013 || Bryan Durkin || No Comments

The coverage of  U.S. budget sequestration in agricultural news came with a bit of irony in one respect. The discussion of an issue requiring a solution in the short-term came as the USDA convened its annual Ag Outlook Forum  in Washington — an event focused on the long-term challenges and opportunities for U.S. agriculture.

It’s an event where federal officials come together with leaders in the ag industry to discuss and analyze the ideas, problems and solutions shaping U.S. farming beyond current budget concerns and recent weather patterns. I was fortunate to be asked to present at this year’s forum on a panel discussing the role of markets in managing risk. We think about this issue every day in our business, and it impacts how we approach every decision in our ag markets. But to others, the technicalities of managing risk through markets can understandably get lost in the focus on the risks themselves — weather, economics, geopolitics or changing regulation.  So I was happy to hear U.S. Secretary of Agriculture Tom Vilsack take some of the last moments of his opening remarks to tie together the worlds of agribusiness, food safety and risk management:

“We want young people to be inspired by the fact that agriculture is the answer to the moral dilemma of our time — how we feed an ever increasing world population as resources become scarce… And it is agriculture that will help spur a new american economy that is focused once again on innovating and growing and manufacturing and exporting. That’s why this is important, because the long term security and safety of this nation is absolutely dependent on us managing these risks that we’ve identified today.”

Indeed, the global population overall is expected to increase to 8.3 billion people by 2030 according to the U.N. Food and Agriculture Organization. In addition, more of the world is eating well as middle classes in places like India and China continue to grow. Increasingly, these countries and others will look to the U.S. to export a shortfall in commodities like wheat and corn. But it’s not just the BRIC countries that we hear so much about that rely on the U.S. for grain. Recent news reports of grain demand from places like Iraq and Bangladesh can have an impact on the price for of grain on CME Group markets as well. But just because global demand increases does not mean the historical risks of farming will suddenly disappear. Droughts, floods, legislative adjustments and international conflicts will continue to exist. And that’s why, in a world that needs more food, the role of risk management through markets is as important as ever.

Our markets in Chicago were formed more than 150 years ago because farmers needed a central place to manage the risks of doing business, and guard against wild fluctuations in price and demand for their product. We have a special tie to agriculture.  And it’s because of this that we understand that efficient and transparent markets are absolutely essential to the business of farming.

They offer farmers and ranchers the opportunity to manage the risks associated with the unpredictable events that are a big part of their business. They also provide a necessary mechanism for price discovery – which allows the agriculture community to make informed business decisions based on current data.

But when risk is effectively managed in ag markets,  it’s not just the individual or the corporation that thrives. To Secretary Vilsack’s point, a nation’s economic health is helped considerably by the ag industry’s ability to keep itself afloat in even the most turbulent times. And the last year certainly was turbulent for many of our nation’s food producers, with more than 80 percent of the nation’s farmland and half of its counties declared drought disaster areas. The USDA projects that U.S. food costs will rise somewhere between 3-4 percent this year as a result.

I shared with the Ag Outlook audience our infographic on what goes into food prices – an illustration of the new landscape for risks in agriculture, and a reminder that markets are there to help manage all of them.

Read More:

How Markets Help Create Food Security