Cash flow risk ratio : an aid to marketing decisions

Abstract

In the past, the fully regulated marketing environment allowed producers to neglect or ignore the marketing side of their business. Now, with an open marketing system and increased volatility in the commodity markets, producers will have the right and the responsibility to determine their own financial security. One of the most difficult questions for producers to answer, is how much of his/her crop must be pre-harvest marketed. Knowing his/her production costs (both variable and fixed) and range of acceptable production, price, and financial risks are the key to determining higher price objective. Producers can determine their degree of marketing flexibility by using the cash flow risk ratio. This ratio predicts what percentage of the projected crop must be marketed at the expected season average price to meet cash obligations. In this uncertain and risky future, failing to plan may be the same as planning to fail.