Risk management

Jim Dunn

AG BM 460

"To fail to plan is to plan to fail."

Introduction

• Risk management is complicated

• New vocabulary

• New way of thinking

• Many resources available

Cheese Plant

What are some risks a plant might face that could put them out of business?

Sources of Risk

• Production

• Marketing

• Financial

• Legal

• Human Resources

Identify your sources of Risk

• Financial

• Production

• Liability

• Health

• Accident

• Environment

• Food safety

Ways to Manage Risk

• Retain – forward purchase and store

• Shift – insurance - hedging

• Reduce – take precautions – safety training

• Self-insure

• Avoid - do less risky things

What Is Your Risk Tolerance?

• Reflected in the ways you choose to manage risks.

• Understanding your choices and considering each of them may cause you to change your management style to more closely reflect your tolerance for risk.

Enterprise Diversification

Diversification is an effective way of reducing income variability.

Insurance

• Casualty

• Crop

• Life

• Liability

• Environmental liability

• Health

Contracts

• Can reduce risk

• Can create diversification – broiler house

• Can improve management

New Technologies

• Can reduce or increase risk

• Evaluating them is tough

Records

• Managing risk and good records go hand in hand

• Good records don’t manage risk

• Provide much of the information needed to understand critical financial risks

UNDERSTANDING FINANCIAL RISK

• What are my short-term and long-term goals and how do they affect my financial planning?

• Was documented historical information used in my financial projections? Was it accurate?

• Which records do I need to monitor the financial status of my operation?

UNDERSTANDING FINANCIAL RISK

• Which records do I need to document my borrowing requests?

• Which farm record and financial analysis packages might help me?

• What have been the trends in my business’s key performance indicators?

• How do the ratios for my operation compare to those of similar operations?

Ownership Structure

• Sole proprietor

• Partnership

• Cooperative

• Family Corporation

• Public corporation

Some examples?

• A farm

• A feed mill

• A food processor

• A grocery store

• A restaurant – our Mexican restaurant in Brother’s Pizza site

Futures markets basics

• Basic vocabulary

• Long vs. short

• Speculation vs. hedging

• Margin calls

• Basis

• Farmer who takes no action is speculating

Concluding Comments

• Doing nothing is not a plan

• Insurance is essential

• Beyond that identifying the sources of risk is the starting point

• Once you do that then you can develop a plan