Technology is helping agricultural brokers build improved risk-management programs for farmers, allowing them to much more easily chart different strategies based on a producer’s appetite for risk.
New applications and software allow farmers and their brokers to look at their current revenues on a daily basis and map out a future marketing plan based on several scenarios, including price, yield and crop insurance. That means farmers can avoid having to wait to sell grain off the combine and take whatever the prevailing price might be at the time.
One of the new agricultural software programs is AgYield, which allows brokers the opportunity to run several “what-if” scenarios for their clients, says Chris Beavers, the company’s director of business development.
AgYield allows brokers to pull together all the factors that affect a farmer’s bottom line, such as crop insurance, likely crop yield and price expectations to create a marketing plan, Beavers said. The broker can create different types of scenarios, such as one for a farmer with more risk-tolerance, a low-risk tolerance plan or a strategy that sits somewhere in the middle.
The “forecast matrix” quickly computes the impact of different transactions and the profit per acre, he said.
Dustin Johnson, broker at EHedger, uses the AgYield system with his farmer-clients and said it’s completely changed how he does business.
“For the very first time you can test your strategy against hard grain sales, rather than trying to estimate the outcome,” Johnson says.
The forecast matrix allows a broker to build a strategy by looking at what would be the minimum return across multiple scenarios, he says. “We’re drawing from different likely or unlikely scenarios to bring profitability where we need it to be. We can look at insurance, we can look at cash sales and we can look at futures and options to see what is the best return.”
In the past brokers could create other what-if scenarios, but it would take more brainpower to figure out the result, plus there was little chance to guard against computational errors.
“That is what AgYield can do,” Beavers says. “It can show the growers why a strategy is going to work, how it’s going to work and it can identify to the broker where there are some holes in that risk-management strategy.”
Johnson says using the forecast matrix helps at the beginning of the season, once farmers lock in their inputs. Because the matrix shows what profitability will be at the end of the season, based on certain strategies, it gives farmers more confidence to make the sales they need. Additionally, he says this blueprint means less trading, too.
“Once they’re set up a certain way for the year, it’s all about making the tweaks as the price moves. A lot of producers are worried about selling futures or selling grain in general because they’re not sure how big their crop will be. They can visualize what their insurance does for them, with guaranteed bushels, and that gives them more confidence to make the sales they need to. Before, they may have had to buy an expensive put, but that can add to their risk; it might work against them. Their best strategy might be to make cash sales while the basis is strong. This can help them with that too.”
In addition to showing future profitability, AgYield shows farmers where they stand day-to-day, based on their marketing strategy. As the growing season progresses and prices rise, the broker and farmer can adjust what kind of sales to make. “The idea is not to leave much up to chance,” he says.
In the Cloud
Beavers says AgYield is cloud-based, so the broker and the farmer are looking at the same information at the same time without having to be in the office together.
By being able to access the account at the same time, brokers can walk their clients through the marketing plans step-by-step and do so at any time.
Although the futures markets started as a way for farmers to mitigate their risk, not all farmers use futures and options markets to hedge. Part of that reason may stem from not understanding hedging to farmers having suffered losses in the past and afraid to make a mistake.
“The (technology) shows the client what the broker is trying to convey,” says Beavers. “A lot of times, growers are amazing at grain production; however, a lot of them glaze over when you’re talking puts and calls and futures and what have you. They may say ‘I had a bad experience five years ago and I haven’t touched it since.’”
Johnson said he still has clients who are more hands-off on marketing and even with dealing with the internet, but for farmers who want to get more familiar with the process of selling their grain, the software has led to a sharing of ideas at times.
“Some guys get a login and go with it. They might come in with strategies we might not have seen. It depends on the person. But the majority are excited,” Johnson says.
Brokers who work closely with AgYield also have administrative access to their entire book of client market strategies, so they can easily see how all of their clients are doing at one time.
With grain prices off their all-time highs from a few years ago, being able to pinpoint a minimum profit takes some of the stress out of farming, Johnson says.
“The last few years have been volatile. A lot of producers know they need something like this. Before there was a lot of guesswork, but there’s a lot more optimism now, and it reduces the anxiety of where things might end up.”