Risk has always been associated with American agriculture. Not only are producers faced with weather risk, but we are also faced with marketing risk. My presentation will focus on the production risks with some reference to the associated marketing risks. Pricing and marketing risk will be discussed in more detail by the next speaker.

Having farmed for 32 years, I have experienced a lot of risk but the variation in production and weather conditions have been greater in the last ten to 12 years than in the previous 20 years. I farmed through the worst drought in my area since the 1930s in 1988 and the worst flooding in Iowa history in 1993. During those 12 years, the US monthly average price of corn fluctuated from $1.34 a bushel (9/86) to $4.86 a bushel (5/96).

Risk Management in Transition
Climate -- There are differing views about changes in the earth's climate with some arguing that we are in a global warming trend and others arguing that is not true. One thing we know for sure is that the yield variation I have experienced has been consistent with yield patterns across the state of Iowa. Yields have been more variable since 1975 than during the previous 25 years. Even though technology will continue to push yields upward, weather will continue to be one of the major risks producers will face in production agriculture.

Farm Policy -- The evidence indicates that production risks are increasing but there are a number of other reasons why we must learn to manage production and price risk. The two primary factors changing the risk environment are the new farm legislation and global trade patterns. The Federal Agriculture Improvement and Reform Act, better known as the Freedom to Farm Act, became law in 1996. Under the act, crop subsidies are no longer tied to price fluctuations in the market. Instead, producers receive fixed payments over a seven-year period, on a declining basis, ending in 2002. Under the law, the risk becomes greater because the producer must rely totally on the marketplace, especially as we near the year 2002.

Another factor, sometimes overlooked, is that the Freedom to Farm Act increased the risks of the producer because much of the first two years of payments have been capitalized into higher land rents and higher land values. This means the fixed farm payments are being used to pay higher production costs instead of being used to retire debt.

Global Competition -- I want to comment briefly on the global competition we face. Global trading patterns have always been changing but they will probably change faster as we enter the next century. In the 70s and early 80s, everyone thought the Soviet Union was the answer to our world trade needs. Look where we are today! China is now being looked upon as a major buyer of U.S. agricultural products. There are a number of critical points to consider. The market is indeed large but can be disrupted at any time. The potential is large but the downside risk is also large. The stability and policies of governments can greatly impact our ability to sell agricultural products. For example, human rights issues and other political disagreements can quickly disrupt markets. The changing weather patterns I referred to earlier can produce production variations in the rest of the globe as well as here. Along with changing global trade patterns, several major grain-producing countries are de-emphasizing grain reserves. This, combined with a similar policy here at home, means increased price volatility.

Managing Yield Risk -- Managing yield risk has always been a challenge for the American producer. Producers can have the best of prices but if they have little or nothing to sell, the results can be disastrous. Production risk can be controlled somewhat by making sound management decisions. I will discuss managing yield risk under these six general headings:

* Capital Investments
* Crop Production Practices
* Crop Insurance
* Access to Inputs
* Production Arrangements
* New Technology

Capital Investments --
1) Irrigation. An irrigation system lowers the risk of crop failure in a dry year. However, the total investment cost for a pivot system can be in excess of $600 per acre including the well, land preparation and the sprinkler system.

2) Drainage. In my area tile drainage is used extensively to reduce the risk of crop failure in years of excess rainfall but the cost is $400 to $500 per acre.

3) Machinery. Machinery capacity in excess of what is needed in a normal year allows the work to be completed in a timely manner if there are delays due to weather, breakdown or other unforeseen events.

For any capital investment, I compare the expected returns with the alternative uses of the capital including other risk management strategies such as the purchase of inputs. Since these investment costs are high, we must also look at strategies which do not require a direct expenditure to reduce risk such as diversification.

Crop Production Practices --
1) Crop rotation. Having a crop mix not only has biological benefits but spreads the risk. For example, July is the most stressful month for corn in Iowa and August is the most stressful month for soybeans. The overall yield risk is then reduced significantly by raising a 50-50 mix. Crop rotation has the benefit of reducing the amount of chemicals I need to use. This reduces my costs and, probably just as important, reduces my personal risk by reducing my exposure to chemicals.

2) Diversification. There are potential benefits of diversifying into more specialty crops but the risk for me is that the markets for many of these crops are not yet sufficiently developed to reduce my overall risk. Other issues are acquiring the production expertise and having the necessary equipment for a new crop.

3) Tillage System. No-till can lower a farmer s production costs. I consider reduced tillage to be a long run risk management strategy. In the long term it will save soil which will allow me to remain competitive from a soil productivity point of view.

4) Pest management. A critical factor in the effective use of chemicals is the timing of application. Also, it is critical that the correct herbicide is used for the specific variety being sprayed. There have already been cases of Roundup mistakenly being applied to varieties which were not Roundup-ready. An increasing concern with genetically engineered seeds is the risk of chemical drift. One outcome is that custom application costs could increase substantially due to the potential liability problems. I consider my chemical choices as a complement to my rotation decisions. Emerging technologies will alter the choices.

5) Spatial distribution. There are really two aspects to this. Weather conditions can change significantly over a 10 to 20 mile area. If a farm is not concentrated in one area, the risk of a major crop disaster is reduced. Spatial distribution also will probably mean different soil types will be farmed. Having sandy, clay and silt loam soils is a hedge against weather variability. The tradeoff to spatial distribution is higher production costs due to the travel.

Crop Insurance
There are a number of reasons for the increased use of MPCI in recent years including the increased costs of production, crop failures in large areas, and pressure from lenders. But the main reason has been the action taken by Congress to eliminate ad hoc disaster relief. There wasn"t t much incentive for producers to buy MPCI when they knew, under political pressure, Congress would come to their rescue. Congress has now sent the message that MPCI is the basic tool for disaster relief.

Crop insurance has an expended role in my operation. By working together, the government and the private insurance companies have brought out new and innovative products and offered me more coverage choices. Last year there were five crop insurance products offered in my county. These were:

CAT.
This replaced the federal safety net for a small administrative fee.

APH.
The standard program offered increased coverages in bushels and price per bushel.

Revenue products.
Revenue Assurance (RA) provides a minimum level of revenue guarantee. Crop Revenue Coverage (CRC) provides a minimum level of revenue guarantee and extends coverage to cover the replacement cost of marketed bushels. It was available for the first time in Iowa and Nebraska for both corn and soybeans in 1996. It was expanded to several other states in 1997. I use CRC with my soybeans. GRP provides coverage based on the NASS county yields.

While these broad choices are good for producers, the range available requires time and effort to become knowledgeable about each choice. The coverage has expended from yield only alternatives to alternatives which complement my marketing plans. My insurance and marketing plans are now developed simultaneously.

Access to Inputs
1) Land Rental and Land Acquisitions Arrangements. This is an increasing risk consideration. I own 360 acres and rent an additional 860 acres, most of it on a crop-share basis. My philosophy is to keep landlords aware of the practices I am using and the decisions I make regarding the use of their land. I personally try to farm land to minimize soil erosion and that is consistent with landowners philosophies. Some people are concerned that land is often inherited or purchased by people not directly involved in agriculture. However, these people often have a farm background or family connections to the land. To me, this is a way to bring outside capital into agriculture. There is intense competition for land. This raises two issues. If the rental or purchase cost is too high for an individual operation, producers must be willing to pass up the opportunity and select only the situation which will enhance their financial position. Producers must also plan their operation so their labor availability, machinery capacity, management structure and land base are all balanced.

2) Purchasing Other Inputs. There are two issues here. There is an increasing trend to use more custom operators. Personally, I do all my own field work but individual operators have to decide what works in their situation and in their cash flow. There is also the discount house phenomenon of trying to reduce input costs by buying from a so-called discount house which may be some distance from your farm. There are tradeoffs with supporting and maintaining local suppliers and receiving the service that may be provided by local suppliers.

Contract Production
This is also directly related to marketing risk. I think there will be more contracting in all crops in the future. The advantages are a potentially higher price and an assured market. I see two disadvantages. One is the additional handling facilities that may be needed and the other is the requirement, in some cases at least, to purchase the inputs from the contract commodity buyer. Related to the facilities requirement is the risk of maintaining the purity of the product. Another risk is producing the quality, which sometimes cannot be controlled due to weather, called for in the contract.

New Technologies
I look forward to the introduction of cutting edge strategies and technologies. While I am not necessarily the earliest adopter of new technology, I am a relatively early adopter of those technologies which financially help my operation. For any new technology, I think farmers need to estimate the expected costs and benefits for their operation and have a set of criteria they use for their decision as to whether they will adopt it or not. Each technology involves an individual analysis for each operation. In all likelihood, risks will be reduced with the new technology but probably a higher level of management will be required. Let s look a some of these new technologies:

1) Precision farming. My first direct experience with precision farming was last year when I used a grid sampling to determine fertilizer application rates on a new farm last year. I found there was a large variation in the soil conditions and fertilizer needs over the farm. I can see that precision farming techniques such as combine monitors hold real promise if producers are prepared and equipped to use the data.

2) Genetically altered seeds. I have not used Bt corn yet and will probably use Roundup ready soybeans next year. I think there has been a yield drag with these genetically altered varieties because these genes were not initially used with the highest yielding hybrids. My analysis of this technology runs like this: Bt corn costs about $10 per acre and that represents about 10 percent of my total cash input costs. I use 10 percent as a cutoff point for any added cost. If a change is going to increase my costs by 10 percent or more, I look at it very carefully. These seeds also add flexibility to achieve my personal goals. For example, I am looking at Bt corn because it will reduce my exposure to chemicals and is good for the environment. Other genetic applications expand my timing window for chemical applications and reduce costs.

3) Seed selection. Proper seed selection to fit the situation is important. Seed varieties are very condition-specific. That is, they are bred to produce maximum yields under specific growing conditions. If those conditions do not occur, yields may be reduced. There probably are other hybrids which would have done better under those conditions.

Information Sources
Farmers are faced with an information overload. The biggest challenge for me is to select the part of the available information that I can use on my farm. We are particularly bombarded by the seed and chemical companies. I use these and other vendors as a valuable source of information but I look for fair and knowledgeable representation of their products. I need to know the strengths and shortcomings of the products for my conditions and my farm situation. I need help to focus on the details that apply to my operation.

I use a number of different methods to help me make decisions and get information for my farm. I am a member of the Farm Business Association which gives me an analysis of my farm and cost data for my situation. I belong to a small marketing club which meets about four times a year. There are only six farmers in the group and they are spread out over about a 20-mile radius. It is a useful means to exchange ideas on market trends and implications. We also invite outside speakers from the university and the private sector. Before I make any major decisions or capital investments, I may discuss the idea with three or four people I call my network of business friends. They aren"t necessarily personal friends but are people whose judgment and opinions I respect. Through my participation on the executive committee of the National Corn Growers and other farm activities, I have made contacts across the country and I often discuss the farming situation with them.

I am a strong supporter of Extension as an unbiased source of information. Iowa State discontinued a major crops field day in 1976 but they recently revived it. This is an important event for me to see what research they are conducting and to assess the applications for my operation. Extension needs to be responsive to my changing needs with tools and techniques to analyze the products and technologies available for me to use.

Summary
Even though American agricultural producers will continue to have some of the world's best technology for crop production at their fingertips, price and yield risks will be part of their life. It will be up to the American producers to manage those risks to the best of their ability, in a way that is appropriate for their situation. As we approach the year 2002 and the end of the current farm legislation, I don t believe there will be money in the U.S. Treasury or the will of the American people to return farm programs to the days prior to Freedom to Farm.