A good risk management adviser can be a valuable asset for agriculture producers, especially during volatile markets. As prices and margins swing widely, threatening short-term cash flows and long-term margins, it can be particularly helpful to have a partner who provides objective and sound guidance with your marketing decisions.
If you’ve ever heard a horror story about a farmer who lost big despite working with a risk management consultant, you know that just the fact of having an adviser isn’t a guarantee of a successful outcome. One reason for that is not all risk management consultants are created equal, so you should choose carefully. Who you work with — and how you work with them — will affect whether you achieve your risk management goals. Following are some factors to consider when choosing an adviser, as well as tips for getting the most out of that partnership.
Familiarize over forecast
Some agriculture producers look for consultants who will tell them where prices are going. For proof of that skill, they might ask several consultants for their track records of success beating the open market.
While this comparison may seem logical, it rests on the assumption that all operations should manage their risk in the same way. In reality though, each operation will undoubtedly face a variety of different risks and have different goals. That means there is no single best outcome for all clients, and no single best strategy that is right for all clients, even at the same point in time.
You should ask a prospective consultant about their background, experience and how they work with their clients. The best consultants will base their recommendations on each client’s unique set of circumstances, as well as their insight about market and margin environments.
While we’d all love to have a crystal ball to see into the future, the fact is that no one knows for sure where prices will go, and you should be wary of anyone who claims otherwise.
Keep it simple
Despite extensive knowledge and experience, even very astute consultants can fall short if they don’t convey what they know in a way that you can easily understand. A good consultant will take the time to educate you about the market and margin environment, as well as any strategy they recommend, so you can make a well-informed decision.
Keep in mind that there are multiple ways to achieve the same objective and a strategy doesn’t have to be complicated in order to be effective. A good consultant should not advise you to use any strategy that feels over your head, especially if you are new to managing forward margins. Instead, your consultant should be able to provide straightforward explanations about how a particular strategy works, including its risks and benefits, as well as the various possible alternatives.
In addition, you shouldn’t be left wondering whether or how a recommended strategy will help you reach your goals, or if it is appropriate for a given margin opportunity or the current market environment.
Stick to a plan
A good consultant is able to add value to your risk management and decision-making process in multiple ways, including helping you stay on track. With so much at stake from each of your marketing decisions, fear or other emotions can be difficult to ignore in the heat of the moment, particularly when markets are volatile or margins are declining. By adding perspective, a good consultant can help you see a single dramatic market move in a broader historical context. That can keep you from making emotional decisions to change course or abandon a sound strategy. What’s more, by keeping you focused on your long-term objectives and how your plan will help you achieve them, your consultant can help minimize second-guessing of your decisions after a single year or marketing period.
Make it even better
Although your adviser should be able to provide useful information and insight from the get-go, you should expect the value of that relationship to continue growing. Over time, your consultant should help you deepen your understanding of markets and margin management strategies. While a well-conceived plan should not be scrapped based on a single marketing period or event, savvy consultants will look to fine-tune and improve your plan based on your satisfaction with the outcomes of marketing decisions made over the course of a marketing cycle.
In addition, they should periodically review your plan with you to make sure it accounts for any new priorities that have entered the mix and that it still has you on track to meet your goals, especially if those have changed.
Know your needs
Perhaps the most fundamental requirement for successfully reaching your goals is knowing what you want to achieve. You’ll get your adviser relationship started on the right foot and headed in the best direction if you can identify your biggest challenges and where you need help. Are you looking to gain more control over cash flow and debt levels so you can expand your operation? Do you want to increase the value of your business so you can pass on an appreciated asset to the next generation? Or do you need to demonstrate a sound risk management plan to your lender?
The answers to these questions will determine the right approach to managing forward margins for your operation. That’s why a good consultant will ask you about these matters before recommending any particular strategies. At the same time, you should be open to sharing your past experiences and other details about your operation, such as your financials — including debt load and leverage — as well as your costs of production. That information will go a long way toward helping a consultant understand you and your operation, which in turn will help them determine how they can best add value.
In short, the best adviser relationships are strong partnerships built on trust and the shared goal of helping ensure your operation’s long-term success. If you have questions or would like to discuss how you can get more out of your consultant relationship, call 866-299-9333.
There is a risk of loss in futures and options trading. Past performance is not indicative of future results.