Margin Management revolves around the idea of identifying opportunities to protect the profitability of an operation by making decisions off the bottom line. In this way, both input costs and revenues are considered together as a single unit of risk, and risk management decisions are made in the context of the overall profit margin – not the individual pieces of that margin.

As with most anything, the more time you put in, the more you will get out. Margin Management requires producers to accurately model their operation and set objective goals that are acted upon when achieved. There is an initial time commitment involved to help build the model which will be much easier if accurate records have been kept for the operation. Ongoing time commitments revolve around understanding the various tools available to manage profit margins, and how to get the most out of those tools. This will vary based on the experience of the producer and how educated they are when it comes to contracting alternatives. Classes are available to help build this knowledge.

This is perhaps the most difficult situation that a producer may be faced with. On the one hand, it is hard to spend money “protecting a loss.” On the other, the risk still remains and there is no guarantee that the unrealized loss will not become larger. Strategies can be developed to limit further deterioration in margins, but unless the outlook improves, the producer will likely realize a loss. It may however be true that while spot margins are poor, opportunities exist in deferred periods where margins are good. This is where the producer should focus; periods where they can take action to protect projected favorable margins.

Margin calls represent increased performance bond obligations to hold an exchange-traded contract such as a futures position until that contract is closed out or offset. For a hedger, a position in the market will be in the direction of their risk. If the position is moving against them such that a margin call is generated, it means that the market is moving in the direction of their opportunity – improving their overall profit margin. As an example, if I raise hogs and sell hog futures to protect against lower prices, if the market moves higher after I initiate my short futures position it will generate a margin call that will require increased capital to maintain that selling obligation. The physical hogs on my farm are appreciating in value though, and I will receive this added value when I eventually sell them in the cash market. The most important thing to realize is that while the hedge is losing, it means that position in the cash market is improving.

No. While exchange-traded derivatives are some of the many tools that are available in the marketplace, producers do not need to contract using Futures or Options on Futures to employ Margin Management. Many alternatives may already exist in one’s local Cash Market that can be effectively used to offset or mitigate the risk associated with forward profit margin opportunities. One might choose to open a brokerage account though to have more tools available at their disposal, as well as to compliment positions they have already taken in the cash market in order to add flexibility in their pricing.

This touches on an essential difference between managing margins vs. managing prices. The idea behind Margin Management is to shift the mentality away from a price centric focus to one of evaluating the bottom line. In this way, it is not necessary to bottom pick input costs and top pick sales value, saving time to evaluate margin opportunities rather than getting buried in the details of day-to-day price movements. Also, it may often be the case that choosing to commit to either purchases or sales independently can actually introduce more risk to the operation than staying completely open to the market.

Producers have many tools available when it comes to protecting profit margins. Depending on the type of contracting one chooses, it may be true that you are “locking in” to a fixed price level for either your input costs or your sales revenue. Other tools may allow you to protect a price level without limiting your ability to participate in more favorable prices. In this way, your profitability is not necessarily capped, although there is a cost associated with maintaining that flexibility. For more on strategy descriptions, please reference Core Strategies under Tutorials.

While being profitable now is obviously comforting, it is important to realize that nothing stays constant. Also, while forward profit margins may look great today, things can change quickly for reasons that may not always be obvious. Having a margin management plan that objectively measures forward opportunities and provides direction for acting when those opportunities are favorable can help make sure you don’t miss the chance to secure profitability in your operation.

No, and there are obviously other factors that can impact your profitability besides input costs and sales prices. However, applying the Margin Management approach and making strategic decisions based upon a better understanding of where your business stands within a historical context may increase your confidence and improve your chances for success.

Knowledge is power. Gaining visibility into forward opportunities will allow your business to better plan for the future with a higher degree of certainty. Moreover, developing a plan to manage forward profitability may help remove much of the emotion typically tied to marketing decisions.

The concept of protecting a margin is not new. Focusing on cost management while maximizing sales revenue has allowed businesses to sustain themselves and grow for centuries. Looking at risk from a margin perspective may sound new for agricultural producers, although this practice has been around a long time in the agricultural industry.