Cash flow risk ratio: An aid to marketing decisions
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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 his/her 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.