Sources of Risk and Strategies for Addressing Risk

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					Sources of Risk and Strategies for Addressing Risk
A Partial List
By Kevin Bernhardt, UW Extension & UW Platteville 1 University Plaza Platteville, WI 53818

Production Risk
Production risk is one of the most significant causes of farm income variability. As long as all the factors of production are at work, the car manufacturer knows with some certainty how many cars can and will be produced. The same goes with the shoe, television, and VCR manufacturer. However, production agriculture is unique from these other businesses in one very special way - the output and the manufacturing plant is alive! Whether it is cows, apples, hogs, or corn the output and manufacturing plant of the farm business is a living organism that breathes, gets sick, and can die. For the farm business, anything that presents a risk to a living being is a potential source of production risk. Sources of Production Risk: • weather and other natural phenomena „Local weather affects yields and quality, both directly through temperature and precipitation and indirectly through impacts on pest populations. Global weather affects world production and prices. Weather and other natural phenomena can be responsible for many types of natural disasters” (Benson, 1996). • disease Disease is an obvious risk faced by all living organisms including farm raised crops and livestock. While new technology and products are developed to control disease, diseases are living organisms as well and develop resistance to current control measures. As fast as new control products are developed, evolution results in new resistant, sometimes more deadly, strains. Variability from expected production ranges from little impact to catastrophic. • pests (insects and weeds) Both insects and weeds are a source of production variability in crop and livestock operations, whether it is competition for nutrients and water in a field, consumption of the growing crop, or a parasitic attack in the rumen. Like diseases, as fast as new control products come onto the market, new resistant strains develop. Also like diseases, variability from expected production can be significant, potentially catastrophic. • Management ~ timeliness of operations ~ seed selection ~ crop protection selection and application ~ genetics ~ breeding program ~ health maintenance ~ nutrition ~ fertility program and application ~ poor handling of product/factors of production • weaning and growth rates • feed conversion • pasture carrying capacity • competition for water and food within and across species List of Some Strategies and Tools for Addressing Production Risk: • IPM • diversification

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irrigation drainage crop protection nutrient management excess machinery capacity genetic selection preventative health maintenance treatment programs consistent assessment and evaluation programs tillage systems rotations crop insurance (crop, facilities) maintaining flexibility/alternatives with ~ facilities ~ products ~ timeliness ~ personnel production contracts well maintained and adequate machinery increase farm manager knowledge base ~ attending seminars and workshops ~ reading ~ formal instruction ~ attend field days, farm shows, fairs, etc. ~ producer production clubs/groups INTERNET, farm publications, university publications employ consultants scheduling tools (charts, software, training) manure management/cleanliness sanitation program biosecurity program lab testing (soils and feeds) pregnancy testing programs and tools employee training and performance incentives major farm systems evaluation (utilities, water, facilities) maintenance programs/schedules (machinery, facilities, equipment) geographical dispersion (animals and crops) maintain ready and/or emergency reserve of vital factors of production (electricity, labor, machinery, water, feed, fuel, parts, etc.) producer networks (join up and cooperate in livestock production, grain hauling, enterprise specialization, information, etc.) Good records and farm planning

Price Risk
The terms “market” and “price” are often used interchangeably, but they are distinctly different terms. A “market” is where the activity of exchange takes place, while “price” is the exchange rate. There are risks associated with both the place of exchange and the rate of exchange. Also, price risk exists for both the price received for products produced and the price paid for inputs. Profits are the difference between the two, that is, a high price

received for outputs does not necessarily lead to profits if the price for inputs was high as well. Sources of Price Risk: • Changes in Demand (perceived or real, local or extra-local) ~ changing tastes and preferences ~ changing consumer population size ~ changing level of disposable income ~ changing price level of substitute or complementary goods • Changes in Supply (perceived or real, local or extra-local) ~ changing input costs ~ changing technology ~ weather ~ number of producers • Government Action ~ Changing government policy, laws, and regulations List of Some Strategies and Tools for Addressing Price Risk: • Well written, followed, and updated marketing plan • keeping informed on consumers‟ tastes, preferences, fads, and willingness to pay ~ surveys ~ point of purchase information ~ industry newsletters ~ networking with customers or potential customers ~ competitor analysis • keeping informed on the prices of complementary and substitute goods • keeping informed on weather and production conditions (nationally and world) • price and quality contracts ~ cash with fixed delivery ~ deferred payment contracts ~ with deferred delivery ~ delayed or deferred price > minimum price • basis contract • use of futures and options • production contracts that include price and quality specifications • marketing cooperatives/clubs • direct sales • sales through local retail outlets • on-site retail sales • internet sales • spread sales • forward contract sales • storage • select low price risk enterprises • diversify the business

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obtaining outlook and market information government program participation vertically integrate (producer network, alliance, value added) bulk buying inputs branded marketing maintaining value-added alternatives and/or secondary markets

Market Risk
Sources of Market Risk: • Availability of markets • Market Access • Lack of market information • Lack of “correct” market information • Free and fair markets • Captive supplies • Market power List of Some Strategies and Tools for Addressing Market Risk: • Obtain more outlook and market information • Evaluate the quality of outlook information • Develop in-house marketing • Develop cooperative marketing efforts • Maintain secondary marketing channels

Financial Risk
In its most basic form, financial risk is not having the cash to meet obligations when they are due. A USDA publication on risk management provides a more comprehensive definition of financial risk as 1) the cost and availability of debt capital, 2) the ability to meet cash flow needs in a timely manner, and 3) the ability to maintain and grow equity (USDA/RMA, 1997:13). With similar meaning, but different terminology, lending institutions may refer to financial risk as meeting liquidity and solvency requirements with some margin of safety, and the ability to maintain or grow equity and debt capital capability for future maintenance, expansion, or generational transfer needs. Sources of Financial Risk: • changing asset values • changing interest rates • changing risk premiums • book versus market values • changing foreign currency values • health of national and world economy • debt financing • leasing business assets • any source of production or asset risk that increases the need for borrowed capital

List of Some Strategies and Tools for Addressing Financial Risk: • maintain equity (cash) reserve • maintain equity (noncash) reserve • maintain debt credit reserve • restructuring debt capital • negotiate longer term debt repayment • negotiate more favorable lease arrangements • negotiate more favorable lease payment arrangements • obtain and use more financial analysis information • alternative farm business arrangements that might limit personal liability • sensitivity analysis of repayment capacity based on average and below average conditions. • carry less debt • track closely debt: asset, current, and other debt related ratios to assure soundness • maintain investment portfolio management • well written, followed, and updated strategic and farm business plan

Human Resources Risk (Employees)
As a producer, there are a host of other people that impact your business including family and nonfamily laborers and managers; full-time, part-time, and seasonal laborers and managers; spouses; lawyers; neighbors; lenders; consultants; partners; salespeople; AT technicians; veterinarians; Extension and university professionals; etc. Each of these individuals can have minor or major impacts on the risks you. Erven (1996) notes that human resources play a dual role as a source of risk and as a strategy or tool for addressing risk. Sources of Human Resources Risk: • Employee does not show up at critical times ~ Employee personal and/or family problem ~ Transportation problem ~ No motivation • Employee quits at critical times • Employee not qualified to do the job • lack of effective communication • lack of training • lack of knowledge • lack of oversight • lack of motivation • lack of adequate pool of potential employees • injury or death • discrimination or other legal complaints/lawsuits against employer • Employee does not have the appropriate equipment/tools to do the job • Employees do not understand decision-making process > What decisions can be made and by whom • Employees themselves do not get along causing business/operation problems • Competition for employees makes retention of valuable people difficult

List of Some Strategies and Tools for Addressing Human Resources Risk: • well written and enforced job descriptions, expectations, and consequences • employee training • employee incentive plans • employee orientation and training programs • performance appraisals • performance based compensation packages • review of references • self and employee leadership training • self and employee communication training • self and employee conflict management training • well known and practiced dispute mechanisms • Family and Farm business plans • well known discipline mechanisms • established mechanisms for review, discussion, and action on management decisions • cross-training of managers and employees

Human Resources Risk (Non-Employees)
It is not Just employees that present a risk to the agricultural production business. Other human relationships can have major impacts on the business including relationships with lenders, consultants, government personnel, input suppliers, buyers, neighbors, zoning commissions, and other producers to name a few. Sources of Human Resources Risk: • Lack of a trusting relationship • Poor relationship • Lack of consistent communication • Lack of quality communication List of Some Strategies and Tools for Addressing Human Resources Risk: • Consistent communications • Periodic business reports • Well written, followed, updated, and shared strategic and business plan • Transparency of business and production practices • Farm visits • Business and operation performance reviews

5 D’s of Risk
While these are all a part of other categories of risk, the 5 D‟s of risk represent a unique category of risks that on one hand can be catastrophic to the business in terms of their potential impact, but on the other hand can often be addressed in inexpensive ways. The 5 D‟s are: ~ divorce

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disagreement death disability disaster (see production risk)

List of Some Strategies and Tools for Addressing Human Resources Risk: • Divorce and Disagreement ~ regular family meetings with active participation by all parties ~ assigned responsibilities to all parties ~ regular communications ~ process for conflict and dispute resolution ~ prenuptial agreement ~ written record of decisions and discussions ~ legal binding contractual arrangements (written and signed) • Death and Disability ~ Insurance ~ Regular health check-ups ~ Healthy living practices ~ Cross training/understanding of how to operate all aspects of the business ~ Good records and communications ~ Well written strategic, business, and operation plans

Institutional Risk
Businesses of any kind are impacted by a variety of institutions including government, legal frameworks of society and business, industry structure and cooperation, research, marketing, and technical assistance to name a few. Within government alone, your business may be impacted by policies and regulations involving trade, food safety, environment, taxes, transportation, banking, and macroeconomics. Sources of Institutional Risk: • implementation of new policies, rules, laws, or regulations • elimination of current policies, rules, laws, or regulations • changes in current policies, rules, laws, or regulations • enforcement (or lack of) of existing policy, rules, and regulations List of Some Strategies and Tools for Addressing Institutional Risk: • more, more accurate, and more timely information on changes • more capability to analyze changes • good record-keeping • maintain network with institutional officials (DNR, DATCP, etc.) • maintain transparency of business and production practices • periodic inspection and legal/regulatory check-ups • maintain log of correspondence complete with date, time, people involved, and your own notes. • Subscribe to and read industry newsletters

Asset/Casualty Loss Risk
The loss of intermediate and fixed assets such as production facilities, equipment, breeding stock, etc. Asset risk is somewhat unique in that the probability of a negative outcome may be low, but the cost of a negative outcome may be catastrophic. Also, risk management tools are generally well defined. Sources of Asset Risk: • fire • wind • hail • flood • theft List of Some Strategies and Tools for Addressing Asset Risk: • insurance • machinery, equipment, and facility maintenance programs • well followed safety measures for wiring, outlets, furnaces, stoves, etc. • lock up facilities, remove keys, and other theft preventive measures • good lighting • storage facilities • spare generator

Personal Risk
Whether it is the main manager, a spouse, partner, employee, or other family member, the risk of these individuals not being able to carry out their role can be as little as a temporary nuisance or catastrophic. Sources of Personal Risk: • Unsafe equipment and machinery ~ Equipment and machinery safety and maintenance ~ Lack of knowledge or skill in operating equipment and machinery • Unsafe practices ~ Chemical handling and application ~ Equipment operation ~ Heavy lifting ~ Transportation flow around the farm • Long hours • Stress • Health • Poor lighting • Poor nutrition List of Some Strategies and Tools for Addressing Personal Risk: • self and family health insurance • employee health insurance

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personal liability insurance life insurance disability insurance self and employee disability contingency plans safety training programs equipment and procedures safety check programs cross training of managers and employees physical fitness and healthy living

Technology Risk
Technology risk can take several forms. There is the risk of not adopting soon enough or too soon, risk of investing in soon to be obsolete technology, risk of not properly employing new technology, etc. Agricultural history is defined by the advancement and adoption of new technology. The rate of technology advancement is increasing, and recent developments in bioengineering for crops and livestock suggest that agriculture may be on the cusp of very significant technological change. Sources of Technology Risk: • Using obsolete technology that is reducing competitiveness • Not keeping up with new technology advances • Not making full use or knowing how to fully use technology • Bringing in new risks with technology List of Some Strategies and Tools for Addressing Technology Risk: • keep informed of new developments • create management time to keep up with new technology • invest in a good computer system and internet service • learn how to fully use your computer system and internet service • take continuing education classes • gather information at trade shows and from trade magazines • ask and analyze testing and trial information • negotiate on-farm tests/trials before purchase

Land Use Risk
Significant Sources of Land Use Risk: • Legal action or nuisance complaints resulting from ~ Smells ~ Chemicals ~ Obstructed view ~ Traffic ~ Noise • Zoning regulations List of Some Strategies and Tools for Addressing Land Use Risk:

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Know and keep up with zoning regulations and policy changes Proactive good neighbor relations ~ Festivals ~ Pumpkin patch ~ Hog roast ~ Tours ~ Communications What Is It: Significant Sources of Product Quality Risk: List of Some Strategies and Tools for Addressing Product Quality Risk:

Product Quality Risk
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Legal (Environmental) Risk
Sources of Legal (Environmental) Risk: List of Some Strategies and Tools for Addressing Legal (Environmental) Risk:

Legal (Farm Business Arrangements. Farm Transfer) Risk
Sources of Legal (Farm Business Arrangements and Farm Transfer) Risk: List of Some Strategies and Tools for Addressing Legal (Farm Business Arrangements and Farm Transfer) Risk:

Legal (Other) Risk [liability, contracts, etc.]
Sources of Legal (Other) Risk:

List of Some Strategies and Tools for Addressing Legal (Other) Risk: