When it comes to managing risk, many producers take a belt and suspenders approach, buying multiple risk management products and hoping to ensure they’ll be all right in the future.
Others forgo risk management products altogether, counting on the good times to keep coming. Astute producers land somewhere in the middle, taking a strategic approach to mitigate the impact of potential negative events.
All producers face a laundry list of risks and have a number of risk management tools at their discretion.
For example, crop producers have access to crop and hail insurance, AgriStability and private insurance to manage production risk.
Some will use multiple approaches and potentially overprotect and overspend, others may not use them appropriately based on the risk inherent in their business and some don’t see value in any of the products, choosing instead to self-insure without objectively assessing their ability to do so.
Risk management should be part of your annual planning process, and you should take a strategic approach.
You need to balance the four key areas of the business: operations, market, finance and human resources.
Identify the key risks in each business area and objectively make decisions on each. Gut feeling does not count as objective assessment.
The risks will vary according to each agriculture business, and you’ll find only a couple in each key area that are high priority.
High priority means the event has a high probability of happening and, if it does happen, it will have a large financial impact on the business.
Once you do that, each risk can be quantified and prioritized.
This can allow those using a belt and suspenders approach to re-adjust their strategy, generating more value from the money spent on risk management.
Developing a risk management plan that is balanced to address the four business areas and considers probability and impact will likely be better for the business than spending to protect the business from every type of risk.
For those who aren’t adequately protected, developing a risk management plan is key to staying competitive and profitable.
One bad year will set you back financially, and it may take several years to get out of that hole.
To stay competitive, you have to have a balanced and affordable strategy for mitigating the impact of high risk events.
To develop a plan, producers need to ensure they understand the various risk management products that are available as well as undertake a cost-benefit analysis of each one.
They also need to determine how various products complement each other so they can put together a risk management package that gives them the greatest protection at a reasonable cost.
Analyzing the cost and benefits of various products and how they can best be used in your situation can be complicated and time consuming.
An experienced farm management consultant who is not selling a product can help.
Aaron Honess, B.Mgt, is a partner and a member of MNP’s farm management team in Lethbridge. Contact him at 403-380-1618 or firstname.lastname@example.org.