When thinking about risks to your farm, what comes to mind?
Weather and market risks are usually at the top of the list, but there are many other areas where a farm business may be exposed. These risks are often unrecognized because nobody’s taken the time to go through an exercise of assessing risks and determining how they can be managed, explains Jim Mintert in this episode of the Mind Your Farm Business audio series.
What happens if your main landlord decides to charge $30/acre more or rent to someone else? What happens if your key employee is in an accident? Or if a buyer fails to pay?
“Most farms have never sat down and actually done this in any comprehensive way. The first step is to do it once,” he says.
As the director of the Centre for Commercial Agriculture at Purdue University, Mintert and his colleagues have developed a comprehensive set of tools (found at farmriskresources.com) to help farmers dissect their businesses to determine where they’re at risk.
While managing yield and weather risk is critical, he notes producers must also take steps to close gaps in other areas, such as working capital risk, interest rate risk, customer risk, employee liability — the list goes on.
They describe risks in three categories: business risk, financial risk and strategic risk.
“If you think of business risk, we think of some of the classic things — production risk, price and market risk, but you also have relationship risk, for example with landlords, technology risk — are you keeping up with technology?” explains Mintert.
The downturn in profitability of grain farming in the U.S. has producers refocusing on financial risks, he notes.
“It’s a topic we’ve spent a lot of time on in the last few months,” he says. “We talk about what kind of risks you face on the financial side — what’s your debt situation? Do you have interest rate risk?…What’s your working capital situation? What’s the risk of your working capital eroding over the next several years?”
Strategic risks are often the last to come to mind in the day-to-day cycle of farming, notes Mintert.
“A lot of people don’t think about the strategic risks they could face,” he says, referring to factors beyond a farm’s control, such as changes in government ethanol policy or macroeconomic changes.
- Business risk — production, price/market, casualty, technology, relationship, legal/regulatory, human
- Financial risk — debt use and leverage, interest rates, capital lease commitments, working capital and liquidity, incomplete budgeting or investment analysis
- Strategic risk — external forces (macroeconomic issues, gov’t policy changes, competitor action, changing customer preferences, etc), strategic positioning (how a business creates value to customers), internal resources and capabilities
By identifying risks, a farm can also position itself to take advantage of opportunities, he says.
“The ability to withstand risk and take on risk creates business opportunities,” explains Mintert. For grain farmers adjusting to tight margins, as an example, management decisions in the short-term could open doors to growth opportunities in four or five years, he says.
The exercise of taking an inventory of risks also helps a farm manager overcome biases they may have toward risks they’ve been exposed to in the past.
After going through this intentional whole-farm risk check-up the first time, Mintert recommends repeating the process periodically, perhaps on an annual basis, to ensure risk management strategies are still aligned with the risks a farm faces.
You can find more on risk management on Purdue’s farmriskresources.com website.
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