I have an accountant friend who sometimes has to inform wealthy clients that they’re one paycheque away from insolvency. He serves only medical professionals.
This always shocks them because they think they’re rich.
But while they might have the appearance of solidity, their big mortgages and huge lease payments tend to eat up almost everything they earn, and liquefying assets isn’t a quick or easy process in a sudden cash crunch.
If the revenue is suddenly halted, the client is suddenly insolvent.
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That situation is common to a lot more farms than it should be. I don’t mean the situation of living close to the financial edge, which is often forced upon farmers by the dangerous commodity production business in which they work.
I’m referring to the situation of not knowing how close to the edge they are.
Farmers are used to facing production risks from the weather and market risks from price volatility. Some hedge against those risks and some don’t, but there isn’t a farmer out there who doesn’t realize that the crop could get wrecked and prices could go into the toilet.
However, there are a lot of other forces that can wreck a farm, and many farmers don’t prepare against those.
That idea was part of almost everything discussed at Farm Management Canada’s recent Agricultural Excellence Conference in Winnipeg.
What happens to a farm and the people who rely upon it for jobs if the couple owning it split up? What happens if the operating farmer is disabled? What happens if the farmer dies? What happens if an aging farmer has told his various children various things about their financial stake in the farm, but it doesn’t all add up? And what if he has done nothing to formalize any agreements?
How about a farm based entirely on one industry that gets hit by a regulatory change that destroys its economic viability? BSE or COOL, anyone?
Farmers need to be aware of those kinds of risks, which is the goal of a new guide that Farm Management Canada issued at the conference called Comprehensive Guide to Managing Risk in Agriculture.
It takes the broad view of identifying a farm’s exposure to “known knowns,” “known unknowns” and “unknown unknowns” and gives farmers practical ways of thinking through the risk assessment process.
It was written mostly by Quebec’s Hugh Maynard and Saskatchewan’s Al Scholz and is designed for the average farmer. It’s readable and useful, with exercises to help farmers identify where their risks lie.
One of the best elements of the guide is the section of detailed references to scholarly articles on specific types of risk and the appendix on risk management programs offered in Canada and the United States.
There are a lot of ways to wreck a farm, which is a crazily multi-faceted business, so farmers need to not only manage their operations for those risks but also discover risks that they’ve never thought about.
ed.white@producer.com
