Aaron Sprague discusses first-hand lessons learned in risk management and expansion
January 26, 2012
Holyoke, CO farmer Aaron Sprague spoke at the Wyoming Business Council’s Risk Management Marketing Strategies workshop series in Torrington, WY on Jan. 5. Aaron contributed to the book Applied Risk Management in Agriculture, which is being used as the curriculum text for the workshop series.
Sprague explained that he wrote the textbook after using his family’s farm as a thesis project at Colorado State University, and had just returned to the family operation. The process led to his family dealing with risk management first-hand as they expanded their farming operation.
“We were right at the point where we needed to make some changes if I was going to be home, and that lent itself to the process, which went very well,” he said. One of the best byproducts from Sprague’s thesis was the communication it brought about between he and his father. “It got us started off on the right track. We also ended up bringing my brother-in-law in the deal too, and all of that kind of gave us that first boost.”
Sprague’s contributions to the book included an in-depth look at the Navigator Strategic Risk Management (SRM) process, and how it can be used in a real-world setting – his family’s operation. Since the book was published two years ago, the Sprague family has expanded and diversified their operation extensively.
While growing up, the Sprague operation spanned five miles; today it spans 43 miles north to south.
“We’ve been in a huge expansion phase, basically because three families is a lot to feed,” he said. The operation has purchased some ground, but mostly rents new ground because of the land market, reaching as high as $6,500 per irrigated acre.
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High land costs have impacted the Sprague operation’s breakeven, as have increases in fertilizer, chemical and feed costs in recent years.
“We’ve gotten big into custom farming. It’s nice in that there is a little less risk. You drive over the ground, and get paid. You don’t have all the commodity and input costs, and we custom farm almost as much as we farm for ourselves today,” Sprague said of one way his family has successfully expanded and diversified their operation.
Adding organic hay to their list of crops is another way the Spragues have diversified their production. They market hay to an organic dairy, and Sprague noted that capitalizing on niche-markets, when present, can be a successful way to diversify.
“Yuma is 65 miles away, and they’re a big feedlot area, and ethanol has come in pretty hard, but it has also become a big area of risk. In the past, the market was at 25 cents, and that’s where it stayed. Then about two years ago we were up around a dollar for corn and two dollars for wheat. It’s a big deal anymore. You have to have the corn when they need it. We bought a bagging machine, and now we store corn because the game has changed, and by storing it, we can make good money supplying corn when they need it,” Sprague noted.
“Insurance is always a top-three item for us in our budgets as far as total dollars. It’s getting super expensive, but with the cost of everything anymore how do you not have it is the other factor. I don’t think it’s a good idea to try to save money on insurance anymore. I think the approach is to say, ‘I have x-amount of dollars to spend per acre, how can I spend it best?'” Sprague explained.
Hiring a marketing service has also helped to reduce risk.
“With our daily requirements with production, three guys seem like a lot, but it’s always limited, and we weren’t keeping up with the markets very well day-to-day. That’s been a tremendous deal for us and it’s added quite a bit of money to our bottom line,” Sprague said.
Though he’s unable to quantify the impact his education and book development has made on the operation, Sprague said it’s better equipped the operation to make decisions.
“It has made it a lot easier to analyze and be prepared to jump. If you’re not into using these tools for risk management and an opportunity shows up, you’re going to be thinking, ‘What should I do? Do I know anything about this? What’s my gut feeling?’ You don’t really know, and with the dollars we’re talking anymore it can get kind of hard to take that leap if you don’t really know.
“Educating yourself on risk management prepares you to take advantage of an opportunity when it arrives. It’s super important to have those tools, the information, and that perspective sitting around so that you can make an informed decision. And, for us quite a few of those decisions have been to say no, and that’s a good thing, too. Just as good as grabbing onto a good opportunity is avoiding the bad ones. If you lose a good one it can be trouble, but if you take a bad one, it can be more trouble,” he concluded.