Agricultural risk management continues to cause concern for producers, consumers

Washington, D.C. – “We have a lot going on,” said Mike Adams of AgriTalk at the 2013 USDA Agricultural Outlook Forum. “These are amazing times.”

With agriculture continuing to change and adapt, Adams noted that despite these changes in agriculture, there will always be a new set of challenges.

Farmers have hoped for higher prices for a number of years, and Adams noted that now that these prices are a reality, a whole new set of problems exist.

“It reminds me of they saying, ‘Now that I have all the cards in my hand, everybody wants to play chess,’” he commented. “So we are here to get a keen insight into how we manage these risks, how we use the tools available to move forward in agriculture.”

“When companies can manage risk, a nation’s economic health is helped when companies can stay afloat, even in the most turbulent of times,” CME Group Chief Operating Officer Bryan Durkin said, “and the past year was a turbulent year for many food producers.”

Changing markets

Durkin noted that since it’s foundation over 150 years ago, the marketplace is still continually changing.

“Our markets in Chicago were formed 150 years ago because farmers needed a central place to manage their risk of doing business, a place to guard against wild price fluctuations and demand for their product,” Durkin said. “We have a special tie to agriculture in our company’s history, and it’s embedded in our culture.”

The efficient and transparent markets that provide farmers the opportunity to protect against risk are essential. 

“Over time, farmers and agribusiness have increasingly used our markets to manage risks,” he said. “We don’t have to look far to see how this benefits the agricultural business sector.”

Managing risk

CME Group, he noted, also plays a crucial role in helping companies manage prices, as well, which allows customers to pay lower costs in the grocery story.

“Farmers, ranchers and grain elevators look to exchanges like ours to serve as a safety net, a way to lock in a price for their product so they can increase their gains and limit losses to continue planting the next year,” Durkin added.

He noted that business cannot function without fair, reliable and trustworthy markets, and the environment of trading is highly impacted by the economic regulatory environment of today, coupled with technological changes and reduced trust in the financial industry. 

“We’ve seen market participants react to the current situation in financial markets by deleveraging positions and trying to free up capital, seen in lower trading volumes across equity and commodity markets in 2012 – which is four years after the financial collapse,” he said. “Market users must have the confidence that the financial industry is improving and adapting, becoming more efficient and reliable.”

Electronic trading

New macroeconomic trends, noted Durkin, include electronic trading.

“Market participants, through accessibility of our platform in over 150 countries, see increased vibrancy, liquidity and depth of the markets,” he explained.

The news in electronic trading tends to revolve around dramatic price drops and a rise in high frequency trading.

“What’s most important, regardless of the platform, is a complete market ecosystem that includes soundness, safety and liquidity, integrity and transparency,” Durkin said.

Role of American farmer

“The role of the American farmer has changed in recent years, and the epicenter of the global economic growth is shifting from developed nations to emerging economies whose middle class provides for American-produced economies,” said Durkin.

Risk management by American farmers, he explained, has the ability to reduce food costs on grocery store shelves. Regardless, drought has consequences for food security, not only in the U.S., but also around the world.

“The USDA estimates that food prices will rise three to four percent this year alone,” he said, “and more for the meat and dairy product industries.”

Steady increases are also predicted in the United Nation’s Global Food Price index.

The world food environment will also ask U.S. farmers to contribute more.

“Technology, infrastructure and access to capital will play a major role to answer the demand for higher yield and increased productivity, but risk management underpins all of it,” Durkin commented. “Risk management is a critical resources farmers have relied on for over 150 years.”

Saige Albert is managing editor of the Wyoming Livestock Roundup and can be reached at saige@wylr.net.