As you think about managing risk to stabilize farm income, there are five basic sources of agricultural risk that you should address: production, marketing, financial, legal, and human resource risks. Various tools and strategies can be used to manage each of these risks.
Production risks relate to the possibility that your yield or output levels will be lower than projected. Major sources of production risks arise from adverse weather conditions such as drought, freezes, or excessive rainfall at harvest or planting. Production risks may also result from damage due to insect pests and disease despite control measures employed, and from failure of equipment and machinery such as an irrigation pump.
Strategies to manage production risks include:
Marketing risks relate to the possibility that you will lose the market for your products or that the price received will be less than expected. Lower sales and prices due to increased numbers of competing growers or changing consumer preferences are common sources of marketing risk. Marketing risks can also arise from loss of market access due to a wholesale buyer or processor relocating or closing, or if a product fails to meet market standards or packaging requirements.
Strategies to manage marketing risks include:
Financial risks relate to not having sufficient cash to meet expected obligations, generating lower than expected profits, and losing equity in the farm. Sources of financial risk commonly result from production and marketing risks described earlier. In addition, financial risks may also be caused by increased input costs, higher interest rates, excessive borrowing, higher cash demand for family needs, lack of adequate cash or credit reserves, and unfavorable changes in exchange rates.
Strategies to manage financial risks include:
In part, legal risks relate to fulfilling business agreements and contracts. Failure to meet these agreements often carry a high cost. Another major source of legal risk is tort liability - causing injury to another person or property due to negligence. Lastly, legal risk is closely related to environmental liability and concerns about water quality, erosion and pesticide use.
Strategies to manage legal risks include:
Human resource risks pertain to risks associated with individuals and their relationships to each other. These relationships include those with family members, as well as farm employees and customers. Key sources of human resource risk arise from one of the “three D’s” — divorce, death, or disability. The impact of any of these events can be devastating to a farm. Human resource risks also include the negative impacts arising from a lack of people management skills and poor communications.
Strategies to manage human resource risks:
Managing risk starts with identifying the most crucial risks you face; understanding the potential impacts and likelihood of undesirable outcomes; and, identifying and taking possible steps to mitigate or lessen the impacts. It’s unlikely any one person understands all the areas of risk faced by a family farm. If you don’t know the answer or find it difficult to initiate risk management planning on your own, get assistance from Cooperative Extension, USDA, attorneys, bankers, insurance agents, and other service providers.
Written by Michael Sciabarrasi, Extension Professor (Retired), Agricultural Business Management, UNH Cooperative Extension.