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This study guide provides insights into the major components of risk management for farm business operators in the face of changing operational environments. It covers the concept of risk, the risk management process, and strategies to deal with risks in production, marketing, financial, legal, and human resources areas. The guide also emphasizes the importance of balancing risk management efforts with business goals and personal tolerances.
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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 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.
probability of the occurrence typically follows the identification of a specific risk. However, producers typically have more information available on the potential impact of a particular risk than it's probability or likelihood. This is based on their experiences and observations and the difficulties in collecting a frequency data set. Consequently, measuring the magnitude before the likelihood is a more logical, applicable sequence for producers than vice versa.
A successful risk management plan increases the value of the business because it increases the chances that the business will not only survive but also prosper. For example, effective risk management could result in more favorable lending terms. An effective transition and estate plan will facilitate the successful transfer of the business from one generation to the next. An effective risk management plan positions the operation for the future by managing the impacts that a variety of risks might have on the business, opening up the opportunity to consider new and innovative alternatives.
H. Douglas Jose University of Nebraska, Lincoln, Nebraska, USA