Risk Management Basics

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Risk Management Basics

What Every Farmer Needs to Know

By Nelson Brownlee and James Hartsfield

 

Agricultural producers make decisions in a risky environment every day. The two situations that most concern agriculture producers 1) is there a high probability of adverse consequences, and 2) would those adverse consequences significantly disrupt the business? With the Coronavirus Pandemic currently sweeping the world, producers are faced with decisions which could have major impacts on their farm operations.

 

Risk – What is it?

  • Chance of loss
  • Likelihood/probability of adverse outcome
  • Uncertain consequences
  • Exposure to hazard, peril, or potential loss

Two Components of Risk

  • Frequency of loss
  • Severity of loss

 

Primary Sources of Risk

  • Production
  • Marketing
  • Financial
  • Human Resource
  • Legal

Production Risk – What is it?

  • Any crop or livestock production related activity or event that is uncertain

 

Common Tools for Managing: Production Risks

  • Enterprise choice
  • Diversification – an effective way of reducing income variability and enhance profitability.
  • Contract Production – contracts between farmers and agribusinesses specifying certain conditions associated with producing an agricultural product.
  • Crop insurance
  • Revenue insurance
  • Applying new technologies on the farm
  • Best Management practices

Marketing Risk- What is it?

  • Any marketing related activity or event that is uncertain leading to variability of prices for outputs and/or inputs.

Common Tools for Managing: Marketing Risks

  • Marketing plan
  • Revenue insurance
  • Vertical Integration includes all the ways that output from the stage of production is transferred to another.
  • Value-added products are a change in the physical state or form of the product to enhance it’s value.
  • Contract production – contracts between farmers and agribusinesses specifying certain conditions associated with marketing an agricultural product.
  • Stock Market Options
  • Marketing cooperative
  • Direct marketing

Financial Risk – What is it?

  • Any uncertainty that directly threatens the financial health of the farm business or results in financial loss.

Common Tools for Managing: Financial Risks

  • Recordkeeping and analysis
  • Budgeting
  • Insurance
  • Pay down debt
  • Family living expenses
  • Estate Planning
  • Off-farm employment

Human Resource Risk – What is it?

  • Any event relative to the human element of the farm that is uncertain.

Common Tools for Managing: Human Risks

  • Develop and maintain operating procedures for farm (employee procedures and management practices)
  • Good family and labor relations
  • Disability, Health, Life insurance
  • Estate and Transition plan

Legal Risk – What is it?

  • Any Activity or event that threatens the legal standing of the farm or puts the farm in legal jeopardy

 

Common Tools for Managing: Legal Risks

  • Legal business entities include: sole proprietorships, limited partnerships, limited liability companies, corporations and wide range of trusts.
  • Insurance
  • Contracting
  • Estate/Transition plan
  • Government actions and regulations affecting your operations

 

Risk Management Priorities

  • Minimize safety risks-nothing is more important than safety!!!
  • Use good agricultural practices
  • Support your neighbors
  • Property, liability, and health insurance
  • Pay attention to business management

Summary

  • A bend in the road is not the end of the road, unless you fail to make the turn. Risk management is all about anticipating the bends in the road, and successfully making the turns.