Developing A Risk Management Plan Paul E. Patterson and Larry D. Makus University of Idaho Department of Agricultural Economics & Rural Sociology

Develop A Farm Plan A farm plan is the umbrella under which other plans reside Risk management is a component of each plan, not a separate plan

A Farm Plan Includes : Goals & objectives Land use plan Crop plan Livestock plan Resource inventory Financial statement Budgets Income statement Supporting data

Planned vs Actual Plans and decisions are made based on expectations Evaluation should compare actual to expectations

Risk Risk is the possibility that an outcome or event will not meet planned expectations

Risk Management Risk management integrates production, marketing & financial decisions Risk management is a planning process where you assemble and assess information Every management decision carries risk management implications

Risk Management Requires Understanding of Your financial situation Understanding sources of risk and potential risk Understanding of risk management tools

Risk Management Includes: Evaluation of alternative plans & risk management strategies Implementation of the plan Monitoring the plan Developing probabilities to formalize risk assessment

Probability Probability is the chance or frequency of an event Probabilities quantify the chance of an event occurring

Probability What is the probability that soft white wheat at Portland will be under $4? What is the probability that your wheat yield will be below your 10-year average?

Probability

Cumulative Probability

Risk Assessment Assess your risk bearing capacity How much risk can you tolerate? How much risk protection can you afford? How much risk are you willing to accept

Managing Production Risk Crop selection Enterprise diversification Spatial dispersion Cultural practices Preventative maintenance Risk Reducing technology Insurance

Managing Price Risk Multiple sales Contracts Hedging Market outlook

Managing Revenue Risk Income Protection: USDA, RMA Crop Revenue Coverage: private *IP and CRC combine price & yield protection into a single program

Income Protection Protects against a decline in actual revenue compared to expected revenue for a given year Price protection varies each year

Crop Revenue Coverage CRC Provides: Revenue guarantee, similar to Income Protection Coverage Also provides replacement coverage, allowing for increased coverage if price increases

Managing Financial Risk Factors to consider Debt structure Leverage Resource control Business organization Production efficiency Insurance Reserve funds Off-Farm income

Managing All Sources of Risk Education Environmental awareness Evaluating past decisions

Why Managers Dont Plan: Involves detailed thought & analysis Reminds managers of uncertain future May force manager to seek assistance Forces families to address conflicts

Basic Risk Management Concepts There is no one Best Strategy Balance the potential for a profit against the potential for a loss The key to successful risk management is taking the right risks Risk management does not eliminate risk