7 Ways to Hedge against Downturns in the Farm and Ranch Economy
Insights by Professor George Frisvold: Professor and Extension Specialist in the Department of Agricultural & Resource Economics for the University Of Arizona George Frisvold, Ph.D. gives some advice on how to hedge against downturns in the farm and ranch economy.
So, exactly what do Arizona farmers and ranchers need to do to hedge against these more challenging economic times?
- Save During Good Times. Save some of the extra business income from the recent good years is a number one priority by successful farmers and ranchers.
- Perhaps Solicit the Federal Government to Institute a Tax-Deferred Savings Program for American Farmers. Canada has a tax-deferred savings program for farmers where the government provides a match – something like the employer match in people’s 401(k) retirement accounts. This creates incentives to save during good times to ride out the bad. Unfortunately, we don’t have these types of programs in the U.S.
- Diversify the Crop Portfolio when it Makes Sense. In principle, farmers can diversify and switch to more profitable commodities, but that strategy is less effective when prices have fallen across the board as they have this year.
- Rely on Off-farm Income. Farmers can rely to some extent on off-farm income. More than half the farm households in the U.S. have more than $70,000 in non-farm income.
- Enter into
Forwardand Futures contracts. Farms can enter into forwardand futures contracts to hedge against price risk.
- Look into Crop Insurance. There are also a variety of federally-subsidized crop and revenue insurance products farmers can access. A problem with federal crop insurance programs, though, is that they were not developed and designed with Arizona production conditions in mind. So, for example, Arizona cotton and wheat growers do not benefit as much from crop insurance programs compared to growers in other states.
- Use Technology. Finally, growers can keep abreast of the newest methods and technologies to control costs.
The two best bets for Arizona farmers and ranchers are saving during good times and using today’s modern technology in agriculture to help with input costs. Regardless, these options Frisvold discusses are worth remembering.