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Presented at the
Wisconsin Fresh Fruit & Vegetable Conference, January, 2005
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
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
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 Ds of Risk
While
these are all a part of other categories of risk, the 5 Ds 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 Ds are:
divorce
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
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:
Know and keep up with zoning regulations and policy changes
Proactive good neighbor relations
~ Festivals
~ Pumpkin patch
~ Hog roast
~ Tours
~ Communications
Product Quality Risk
What Is It:
Significant Sources of Product Quality Risk:
List of Some Strategies and Tools for Addressing Product Quality Risk:
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:
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List of Some Strategies and Tools for Addressing Legal (Other) Risk:
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