Dad was pretty smart. He never got upset about the weather, “because you can’t do anything about it.” Your father was probably the same way, and after years of farming they knew what risks could be managed and what could not. You have learned as well how to manage the risks that you can, and either don’t worry about those that are unmanageable or have your farm organization push the government to do something about it. But how do we really deal with those risks that are seemingly unmanageable by an individual farmer?

What are those risks that just can’t be controlled? How about adverse trade policy, or exchange rate reversals. How about the recession that dried up consumer demand, or energy price shocks that peaked late last summer. Those are all considered to be systematic risks, which individuals cannot manage no matter how good you think you are. At least that is the thought of several Purdue economists writing in the March edition of the Top Farmer newsletter.

You can manage many risks. Production risk can be managed with crop insurance or crop diversification. Price risk can be managed with futures, options, or cash forward contracts. Human risks can be managed with operational policies, business succession plans, training programs, and insurance policies. But systematic risks are common to all farms and cannot be eliminated with typical risk management measures.

Since the current recession is a systematic risk, how are commodity prices responding to it, and how did they respond in prior recessionary years? The Purdue economists gauged the volatility of five major commodities in relation to the overall market to find the answer.

Corn prices increased their volatility from 1956 to the present, with Iowa prices showing the greatest volatility, followed by US average prices, then Indiana prices and finally Illinois with the least volatility of the four.

Soybean prices showed the greatest volatility in Iowa and Indiana, followed by US average prices, and finally Illinois with the least.

Wheat prices were the most volatile for the national average, followed by Iowa, Illinois and Indiana, all of which were nearly the same.

Cattle prices were the most volatile for the national average price, followed by Iowa, Indiana, and then Illinois.

Hog prices were the most volatile for the national average and for Iowa, with Indiana and Illinois being the least volatile.

The Purdue economists say systematic risks have increased since 1973 when international exchange rates were altered. Levels of systematic risk for cattle and hogs have been consistently lower and less volatile than for corn and soybeans. Soybeans had the greatest volatility, followed by corn, wheat, hogs, and cattle over the past 50 years of the study.

Although we are in a recession, recessions do not consistently have an impact on systematic risk. The recession of the early 1970’s saw a decline in systematic risk for all five of the commodities, but the risk levels all increased for them in the recession of the early 1990’s.

While the Farm Bill offers the greatest chance at policy change, systematic risk has not been consistent after new farm policy became effective.

Since 2002, systematic risk has been increasing rapidly for all commodities, reaching record highs for both corn and soybeans. The Purdue economists say, “This indicates that agricultural producers are bearing heightened levels of risk which cannot be controlled through agricultural diversification.”

Summary:
Compared to a common agricultural commodity index, there is a great variation for the volatility of the five commodities. While that measure is growing larger, the systematic risk actually peaked in the 1970’s and then declined, it has only been exceeded in the past two years. While agricultural risks are increasing, producers are having to become creative in the ways they offset those risks.