Risk Management Study Guide 1
Risk Management
The operating environment for farm business managers is changing rapidly. These changes
include reduced government support for agriculture, global markets, changes in the structure of
farms and agribusinesses, and changes in production and electronic technology. These changes
pose major risk management challenges for operators and the urgency to develop and deliver an
educational curriculum to address their needs. The major components of this curriculum are:
understanding the operating environment; establishing a mission statement and goals; taking
stock of your ability to handle risk; understanding and managing production, marketing, financial,
legal, and human risks; and building a management team.
RISK AND BUSINESS PLANNING
Risk is the possibility of adversity, loss or damage. In terms of an operational plan it is also the
possibility of not achieving specific goals of the operators and the business. It can impact current
profit levels, the financial status of the operation or the equity position of the owners, and the
satisfaction and well being of the people involved.
Risk Management
Risk management involves choosing among alternatives to reduce the affects of risk. It is the use
of time and financial resources to effectively manage the risk so that the goals can be achieved.
All occurrences which can be classified as risks, affect outcomes but there are differences in the
degree of the impacts or the potential severity. Significant time and money can be spent to avert
a risk but the net benefit may not be positive. Accordingly, it is appropriate to focus on both the
time and financial resources needed to manage the risk and to balance this allocation with the
goals being pursued. The other reason to put risk management in this context is that risks and
rewards are correlated. Entrepreneurial returns will not be realized without taking risks. The
operator must evaluate the potential gains in relation to the potential loss. Lastly, farmers have
different risk tolerances both from the point of view of their financial situation and their personal
tolerances.
The Risk Management Process
Risk management is a process that includes these steps: (1) identifying or listing the relevant
risks, (2) assessing the magnitude of these potentially risky events, (3) measuring the likelihood
of the event occurring, (4) specifying the actions that can be taken, and (5) implementing a plan.
Risk management becomes an individualized process as there are many combinations of
alternatives that could fit with an individual's ability and willingness to bear risk. The process is
built on the foundation of the mission and goals of the family and business operators.
1. The identification of the relevant risks can be achieved by using a set of checklist
questions such as "what could adversely effect my cash flow?", "is my marketing plan
consistent with my financial plan?", "what risks do contractual arrangements pose?". The
five major areas of risk are production risk, marketing risk, financial risk, legal risk and
human resources risk. A series of questions related to each of these five major areas of
risk can be drawn up to identify the critical risks for a particular operation (Baquet,
Hambleton and Jose, 1997).
2. The magnitude of a risk should measure the income and equity impacts. The
measurements should have enough quantification to be able to compare risks and
establish priorities and to be able to determine the time and financial commitments to
alleviate the risks. The outcome should be more than a qualitative measurement or a
simple comparison of the severity of the risks. Often, measuring the likelihood or
