Marketing Tools To Manage Risk

							   Pacific Northwest & Alaska
  Risk Management Education
     Regional Conference

 March   24-25 Spokane, Washington
  Managing Risk Through
Diversification & Technology
         Paul Patterson
     Agricultural Economist
     University of Idaho CES
Managing Risk: Diversification & Technology



 Risk:


   The probability of an adverse effect


  The possibility that an outcome or
   event will not meet expectations
Managing Risk: Diversification & Technology



 StepOne:
   Know your financial situation


   Analyze and understand recent
    trends in your financial situation
Managing Risk: Diversification & Technology



 StepTwo:
   Awareness of Factors Affecting
   Supply & Demand

     - Current Situation
     - Recent Changes
     - Long Term Trends
Managing Risk: Diversification & Technology



 Environmental  Awareness
   1996 FAIR Act
    - Eliminates Supply Management
          (Acreage Reduction Program)
    - Eliminates Income Stabilization
          (Deficiency Payments)
    - Phases Out Income Support
          (Market Transition Payments)
Managing Risk: Diversification & Technology



 Environmental Awareness
   Global Issues
   - Tightening World Grain Stocks
   - Reduced Government Involvement
   - Trade Agreements / Reduction in
    Trade Barriers
Managing Risk: Diversification & Technology



 Environmental Awareness
   Factors Affecting Price Volatility

     - No constraints on acreage adjustments
     - Reduced government stocks
     - Immediate response to market signals
Managing Risk: Diversification & Technology



 Environmental    Awareness
   Trends
     - Increasing farm size
     - Increased specialization
     - Attribute-differentiated products
     - Fashion or niche markets
     - Identity preserved products
Managing Risk: Diversification & Technology



 Environmental    Awareness
   Trends
    - Partnership with suppliers & purchasers
    - Proprietary information & technology
    - Industrialization of farms
    - Concentration
    - Reduced political influence
 Risk management strategies must
fit your circumstances, the current
  business environment, and must
  integrate production, marketing,
   financial, legal and human risk.
Managing Risk: Diversification & Technology



 Diversification   to Manage Risk

   Objective: Maximize net return while
    reducing income variability
Managing Risk: Diversification & Technology



   Types of Diversification:

       Additional Enterprises
       Different Mix of Enterprises
       Differentiated Product
Managing Risk: Diversification & Technology



   Types of Diversification:

       Specific Attribute Product
       Value-Added Product
     Non-Farm    Income & Investments
Managing Risk: Diversification & Technology



   Diversification Issues:

       Product Form &/or Specifications
       Market Location & Availability
       Yield Variability
     Price   Variability
     Price   Discovery
Managing Risk: Diversification and Technology



   Diversification Issues:

       Size/Scale Restricts/Requirements
       Product Volume Constraints
       Special Management Skills
       Production Practices/Technology
       Credit Availability
Managing Risk: Diversification and Technology



 Diversification Issues:


     Counter to Need to Specialize as
      Technical Knowledge Increases
     Comparative Advantage / Disadvantage
     Competitive Advantage / Disadvantage
     Net Return Variance and Covariance
Managing Risk: Diversification & Technology



 Technology’s    Role In Managing Risk

   Objective: Improve management
    and production efficiency

   Compare benefits to costs
Managing Risk: Diversification & Technology



 Technology’s    Role In Managing Risk

   Technology is more than high tech
    and biotech
Managing Risk: Diversification & Technology



 Technology Benefits
   Cost Reducing
   Yield Enhancing
   Quality Enhancing
   Price Enhancing
   Provides Market Access
   Provides Management Information
Managing Risk: Diversification & Technology



 Technology Negatives
   Increased Costs
   Increased Risk
   Applicability Based On Size/Scale
  Consumer Rejection/Acceptance
  Environmental Risk
Managing Risk: Diversification & Technology



 TransitionPlanning
   Feasibility
   Startup Costs
   Additional Credit Needs
   Cash Flow Requirements
   Financial Risk Consequences
Managing Risk: Diversification & Technology



 TransitionPlanning Tools
   Budgeting:
    - enterprise, partial, whole-farm
   Accounting Software:
    - projected cash flow
   FINPACK:
    - comprehensive financial planning
    and analysis package
Managing Risk: Diversification & Technology



   Measuring Risk
     Variance In Net Returns
     Relative Importance of Positive and
     Negative Variance
     Historical Data
      - Does history repeat itself?
Managing Risk: Diversification & Technology



   Relationship of Risk and Profit

     High Risk = High Potential Profit


     Low Risk = Low Potential Profit
The objective of risk management
     is not to eliminate risk.

   Risk management is taking the
right risks to maximize profit while
  reducing income variability and
   meeting financial obligations.