What is Risk Management
The nation’s most successful farmers continue to search for a consistent and knowledgeable approach to risk management. To strengthen the economic viability of their farm and ranch operations, agricultural producers must have at their disposal methods and tools to decide between different alternatives with various levels of risk.
The five primary sources of risk are: Production, Marketing, Financial, Legal, and Human.
Production Risk – Any production related activity or event that has a range of possible outcomes is a production risk. Major sources of production risk which could limit ag producers’ ability to achieve their financial goals are: weather, climate changes, pests, diseases, technology, genetics, machinery efficiency and the quality of inputs. Other casualties such as fire, wind and theft are sources of production risk.
Marketing Risk – Marketing is the part of a farm business that transforms production activities into financial success. Marketing risk is any market related activity or event that leads to the variability of prices ag producers receive for their products or pay for production inputs. Access to markets is also a marketing risk.
Financial Risk – Financial risk encompasses those risks that threaten the financial health of the business. There are four basic components to financial risk: 1) Cost and availability of capital, 2) Ability to meet cash flow needs in a timely manner, 3) Ability to maintain and grow equity; and 4) Ability to absorb short-term financial shocks.
Legal Risk – Legal risk is inherent in many of the day-to-day activities of all ag producers – involving commitments that have legal implications; such as production activities that fail to take appropriate safety precautions, marketing products which can involve contract laws and human issues dealing with employer/employee rules. Legal issues intersect with other risk areas.
Human Risk – Human risk management is the ability to keep all people who are involved in the business safe, satisfied and productive. Human risk can be summarized into four main categories: 1) Human health and well-being; 2) Family and business relationships: 3) Employee management; and 4) Transition planning.
In summary, risk management involves taking a deliberate and knowledgeable approach to dealing with one or more of the five primary sources of risk. Within the Extension Risk Management Education (ERME) Program our key objectives are to help agricultural producers understand the risks inherent in their operations and then how to effectively use and implement methods and tools available to mitigate these risks.
Reference: The above information is primarily drawn from-
Crane, Laurence; Gantz, Gene; Isaacs, Steve; Jose, Doug; and Sharp, Rod; Introduction to Risk Management (http://extensionrme.org/pubs/Intro-Risk-Mgmt.pdf). Extension Risk Management Education and Risk Management Agency, Second Edition, 2013.