Agriculture has always faced uncertainty. Although agricultural risk management has come a long way in recent years, producers face a multifaceted risk landscape that is constantly changing due to unpredictable weather, evolving regulatory frameworks, and volatile markets. In this article, we address some factors that make today’s risk environment increasingly complex, discuss common “blind spots”, and provide tips for distinguishing market signals from noise. 
Big Shifts
Agricultural producers are at the mercy of the markets, the weather, and everything in between. But why is managing risk in agriculture today so much more complicated than years past?
Agricultural risk is more complex because agricultural markets are more complex. Global interconnectedness brings many opportunities to the table, but it also adds a layer of complexity to agricultural markets. Commodity prices are influenced by global trade, and input costs are often tied to energy markets and geopolitics. Policy decisions and production woes can ripple quickly, causing supply chain disruptions across the globe. For example, local drought can coincide with global fertilizer shortages or shipping delays, amplifying risk for producers. Additionally, producers seemingly have less time to react to market swings and policy changes, making management decisions even more difficult.
Market complexity isn’t the only thing shaping today’s risk environment. Global movement of goods and people also increases the potential for exposure to plant and animal diseases. Deciding when and how to manage disease risk can be costly and complicated. Modern agricultural production is also heavily dependent on technology. With everything from automated equipment to general farm management relying on computer systems, protecting your data is more important, and more difficult, than ever.
Fortunately, as the risk landscape continues to change, we’ve also seen risk management tools evolve from simple insurance options to sophisticated, data-driven systems to safeguard farm profitability. Developing a multifaceted risk management plan that accounts for market volatility, unpredictable weather conditions, and potential disease exposure can help protect your interests and save you a headache.
Blind Spots
When it comes to managing risk, we all have “blind spots” – there are some things that we simply just don’t think about as being part of agricultural risk management. And it’s easy to overlook some basic good management practices when we’re focused on market swings and policy changes. Here are a few things to consider: over-reliance on historical data, limited focus on financial liquidity, and concentration risk.
Historical data can be incredibly helpful in making management decisions. It enables you to look back on past choices, evaluate practices that worked or didn’t work, and adjust to achieve your operational goals. However, be careful of over-reliance on historical data – we shouldn’t assume the future will look exactly like the past.
We are often focused on profitability (and rightfully so) but tend to overlook liquidity risk. Price volatility, input cost uncertainty, and long production cycles can make it difficult for producers to maintain financial liquidity. But during market downturns, having enough cash or credit is a lifeline – we shouldn’t assume that lenders will always extend credit in tough times.
Production efficiency matters, but it shouldn’t be the only thing that matters. Whether we’re talking about having one buyer, one supplier, or one method of production, we often underestimate the risk of becoming “too specialized” or concentrated. Concentration risk can amplify the effect of market shocks, because you have no fallback. Diversifying market channels or supplier relationships can provide an added layer of protection – it’s not just about efficiency, but resiliency.
Finding Clarity in the Noise
In a world of data overload and misinformation, distinguishing market signals from noise can be difficult. How do you know what information to trust?
Say it with me: Headlines are NOT market signals. Headlines do often describe what is happening in the markets, but they don’t always paint a complete picture. It’s important to have reliable sources of market information to make the best decisions possible. Reliable sources will tell you where their data comes from and how it is collected. Look for sources that are backed by recognized institutions and have a consistent track record.
One way to discern signals from noise is knowing the factors that influence your decision making. If a data point doesn’t influence these drivers, it’s likely just noise. Utilizing something as simple as an operating budget allows you to understand your cost structure and evaluate production risk, making it easier to identify market signals.
Resources
For USDA Market News, visit https://www.ams.usda.gov/market-news
For peer-reviewed articles from Southern Ag Today, visit https://southernagtoday.org
For Texas Crop and Livestock Budgets, visit https://agecoext.tamu.edu/resources/crop-livestock-budgets/
For a list of Texas A&M AgriLife Extension Specialists and County Extension Agents, visit https://agrilifepeople.tamu.edu/contact-lists/public/units/p-districts