Risk is Central to Farming - Managing it is Critical

Agriculture is inherently risky, but what are some of the key risks, and how do we manage them? As farmers, you are continuously responding to various risks in your operations. Risk management may not be the most flashy or fun component of an operation, but it is a critical consideration. Risks arise from outside factors that can be managed and typically include the possibility of unfavorable outcomes. The various types of risks involved in agriculture include production, marketing, financial, legal, and human risk. 

The first piece of the puzzle is to become aware of the risks and their likelihood of occurring. Production and marketing (or price) risks are the two you are probably the most familiar with. Production risks are events that could influence yield. Some common production risks include extreme weather events (such as drought or untimely frost), crop pests, and livestock diseases. Marketing risk, also known as price risk, involves volatility in both input costs and output prices. Managing marketing risk involves limiting declines in output prices and controlling rising input costs. The most recent examples of price risk we have seen are rising fertilizer prices and low soybean prices during harvest last fall, both due to trade disruptions. A number of factors can contribute to price risk, and these factors can be unpredictable. However, price volatility is likely to persist in commodity markets, so having a plan in place to mitigate downside risk is critical.

Financial, legal, and human risks are also areas to consider, but they are often not at the forefront of discussions. Financial risk is risk linked to finances, including an operation's liquidity, debt leverage, and interest rates. Agriculture is capital-intensive, and many assets can't be quickly turned into cash, imposing cash flow constraints. Further, changes in interest rates and inflation can significantly impact total farm expenses. Legal risks include complying with regulations and federal policy, including labor and environmental laws. Lastly, human risk refers to both personal and personnel risk. There is the risk of illness, injury, or other major life events for the owner and personnel. Producers are also navigating the risk of safety and labor availability.

As a farm owner or manager, you are faced with risk every day. Risk seems to surround us at every corner, and while we will never fully eliminate risk, our goal is to manage it by making choices and putting a plan in place to protect our operation and its economic resiliency. So, what are some key strategies to mitigate various areas of risk on the farm? Well, you are off to a great start, as the first key piece is to be aware of all the various types of risk. There tends to be a focal point on production and marketing risks, but awareness and understanding of financial, legal, and human risks are also important. Another key strategy is to maintain a strong record-keeping system to spot trends and changes early, improving decision-making under pressure. We can't manage what we don't know, so having a detailed record of historical performance supports informed decision-making. This can assist with several areas of risk and support liquidity management. Other risk management strategies include enrolling in federal crop or livestock insurance, using forward contracting or futures and options, investing in personnel training, and having clear operating procedures and succession plans in place.

The key takeaway is that risk is everywhere, and farms are unique, so each farm will likely have varying risk management strategies. The goal is to manage risks and create stability to safeguard the operation from unexpected downturns. If there is one place to start, review your records from the past year and identify what sources of risk are most likely to appear on your farm – prices, disease, personnel, or others – and build a plan for navigating those challenges.

This article was originally published in Lancaster Farming.