Technological advances over the past decade are helping farmers run their businesses better, whether it’s improved seeds, more efficient equipment or satellite-mapping technology. Yet there have been limits to how much technological advancement the agricultural industry has witnessed on the risk management side.
It is this area that may usher in a new wave of advancements in agriculture, says Justin Kelly, president of AgYield, an agricultural risk management software provider.
The past 10 years have been a sea-change for agricultural technology on the production side, as agribusinesses help farmers focus on raising bigger crops. The run-up in crop values during the commodities boom made investing in agriculture a worthwhile venture.
“When there was $3 corn, there wasn’t a lot of incentive to invest in technology,” says Kelly. “But when corn hit $6, $8, there was a lot of revenue in the pockets of farmers, and there was an incentive to improve technology.”
But with crop prices now far from their all-time highs, there could be greater incentives to work on improving risk management, he says.
“The last five years were exciting because prices went up to levels not seen before, and with $6 corn, farmers pushed for 240 bushel an acre. But with prices going sideways or down, there’s going to be a focus on how to keep costs down. There will be a push to more efficiency. Maybe farmers won’t push to get that 240 bushel yield because the fertilizer costs too much to make it worthwhile.”
Kelly’s firm AgYield is one of the new technology firms that focus on the producer’s bottom line. It has rolled out its risk-management software that helps brokers give their farmer-clients a clear picture of not only their current accounts, but also a forecast of what their minimum profitability for the year will be, based on different hedging strategies. The software pulls in a farmer’s crop insurance and expected yield, and allows the broker to build a marketing plan using futures and options. The software is available to the farmer, broker, crop insurance agent and banker, allowing any of them to see the financial health of the producer at any time.
AgYield started as an in-house hedging system in Iowa Grain, Kelly says, but became a stand-alone company in 2012.
Kelly says just as high grain prices attracted new investment into agriculture, the high grain prices were also the genesis behind AgYield. He was a corn pit broker in 2008 when corn was hitting all-time highs and saw plenty of risky situations.
“There was a huge amount of risk. Just as corn hit all time highs, months later it was trading at $3 a bushel,” he says. “There was so much change in price, and we were looking for a way to manage risk. There weren’t any good tools to manage risk. All the development in technology has been on the production technology side, helping farmers plant, but not on the price component.”
The genesis behind Ag Yield was “the huge amount of risk” farmers faced in 2008, according to Justin Kelly.
Kelly grew up on a corn and soybean farm and received an agricultural business management degree from Purdue. His family owned Iowa Grain, which was a Chicago Board of Trade clearing firm until it was sold to ADM in 2008. He started as a runner and rose through the ranks until he was filling orders for clients.
Kelly says inventing new ways to hedge risk isn’t necessarily a pressing need at this point, rather it’s actually getting farmers to fully use what risk management tools already exist to cushion their operations.
“We have more control over price than we do yield, so if you look at all the tools CME has, and you look at all the crop insurance policies available and other price products out there, there are lots of different ways we can combine these to put in a pretty solid price floor in the market and allow upside potential,” he says.
For instance, he explains, “you don’t know if you put on fertilizer that it it will guarantee 150 bushels per acre, but if you buy a $4.50 corn put, you know your minimum price.”
Farmers can start with their existing crop insurance policy, then they can add futures and options based on their risk tolerance. But many producers aren’t taking advantage of this protection, he says.
“Based on statistics, 80 percent of farmers don’t use futures or options at all, so that’s a big problem. Eighty or 85 percent do use crop insurance. I’d argue though that many don’t use it to its full power or potential, so by adding some of the tools available just at the CME, in combination with crop insurance, would be a huge step up,” Kelly says.
There are some fears farmers have about using futures and options, he says, but those fears stem from a lack of knowledge.
“There’s a general lack of knowledge on how they work, the correct way to use them,” he says, adding that assuaging these fears is part of the reason why AgYield was created.
AgYield is working with some major agricultural schools like Texas A&M’s master marketer program to teach farmers about futures and options, and Purdue is working with the firm to incorporate it into some of their classrooms. Regional ag banks are also hosting workshops to educate farmers on risk management, he says.
Right now AgYield is focused on row-crop farmers, but the “natural progression” is to expand to dairy and other livestock producers, he says. They’re also in talks with agronomic firms on the input side of things.
“I’d like to get to the point where a farmer could say, ‘if I put down this type of fertilizer, how does it change my yield?’ It’s definitely a progression I see happening.”