South Carolina farmers are gearing up for a very challenging 2016, and they may want to look at either options or futures as risk management tools. If not using options or futures, farmers with crop insurance may want to use a basis contract where they can lock in a delivery price and have insurance behind it.

Clemson University’s newly hired Extension economist also encourages farmers to consider hedging, develop a marketing plan and closely examine their balance sheets as they  navigate the tough year ahead.

Nathan Smith has been on the job at Clemson since January, but he is no stranger to the Palmetto State. He is a South Carolina native and earned his undergraduate degree in agricultural economics from Clemson before earning an M.S. in agricultural economics from Auburn University and a Ph.D. in agricultural economics from the University of Kentucky. Prior to returning to South Carolina, Smith was Extension economist with the University of Georgia from 2000 to 2015.

“For this year, make sure you have a marketing plan pulled together,” Smith said at a seminar on managing price and production risks at the SC. AgriBiz and Farm Expo in Florence Jan. 13. “You need to know your price target; you need to know your costs. This year, prices are going to be on the lower side, and there might be some opportunities to take advantage of hedging.”

“You need to look at when opportunities arise to lock in a price that you know will cover costs. And it may be that we’re just going to cover costs this year. You do have some price protection with revenue insurance,” Smith said.

Balance sheets and cash positions

One thing is certain, Smith stressed, farmers need to examine their balance sheets and evaluate their cash position, net worth and equity.

“That’s going to your starting point with what you can do with your lender this year. Know your cost of production and returns Your planting decision is based on your variable costs. You need to look at which commodity gives you the best chance for covering all of your costs,” Smith said. “Your price target needs to include those things like return to management, family living, interest and depreciation as well as your variable costs.”

Of all the commodities, Smith is most bullish on corn. He believes strong demand for ethanol and livestock feed will likely support corn futures this year. He sees corn prices trading in the $3.75 to $4.00 per bushel range, with a downside of $3.15 to $3.20 in a worst case scenario.

Smith encourages farmers to remember that tough times will be followed by better times. He said it is important to remember that “high prices cure high prices and low prices cure low prices.” Farmers need to prepare themselves for opportunities when the market does turn around, Smith said.

 “One of the top famers in Georgia, who has retired now, said though he didn’t like to go through these tough times, his best years came right after the tough times because it forced him to get more efficient,” Smith said.