Economics: September 2003

Preparing a risk management plan each year will allow you to review the risks associated with your farm or ranch. The benefit of such a task is making better business decisions and a greater peace of mind. Preparing the plan will uncover your level of aversion to risk, and knowing this information will allow you to identify strategies that are tailored to your business. There are several areas of the business that deserve a risk management review.

Government programs are a risk management tool. Oftentimes, it requires a large commitment of time to analyze the programs that fit the goals of the business. These programs are complicated but deserve analysis since they impact the net income of the farm.

Developing a livestock and crops marketing plan is another risk management tool. Knowledge of your cost of production will allow you to choose among the myriad of risk management "products" available in the commodity futures market. Some of the tools allow minimum price objectives while other marketing tools offer a lock-in price. In either case risk is not eliminated but managed.

Annually, insurance coverage should be reviewed to determine if the proper level of coverage is in place. Machinery, buildings, crops and livestock are easily insured by many farm insurance companies. Other insurance products are available for insuring risks associated with life, health, disability, legal and various other risks.

Accounting and financial risks are additional kinds of risks agricultural producers incur. Accounting risks refer to adopting the proper accounting system while financial risk relates more to the business' ability to withstand financial losses. The Enron accounting situation underscores the need to have accurate and meaningful financial information to make decisions. A good accounting system should allow you to determine which enterprises are profitable, allow you to calculate the breakeven cost of production and determine the return on investment.

These are just four of many risks that need to be managed by an astute farm/ranch owner. There are several other risks not mentioned with human risks being one of those. The goal of managing risk is to calculate the level of risk your business is exposed to and strategically manage the risk to maximize your profit potential.