Self-Assessment: Overview Decide that area of operation that need attention Develop a plan and a qualitative self- assessment of those areas

Self-Assessment Managing For the Right Risks in Agriculture Risk management: choosing among alternatives to reduce the effects of risk. – Evaluating the tradeoff between changes in risk, expected returns, entrepreneurial freedom and effects on family and labor.

Self-Assessment Self Assessment Managing for the Right Risks in Agriculture: Business Plan Must identify and establish goals Negotiate and compromise to determine the most important goals, start with family/business partner goals and then develop business goals so family/partner goals are satisfied. Must attach costs to goals Develop business plan guided by goals Always manage with goals and business plant in mind

Self-Assessment: Review When creating a business plan, which of the following should you do to start the process? – A. Must identify and establish goals for your business. – B. Negotiate and compromise to determine the most – C. Must attach costs to goals – D. All of the above.

Self-Assessment Self Assessment: Managing for the Right Risks in Agriculture: Production Risk Production risk- anything that affects crop yields or livestock performance Many of these things are out of our control, but measures can be taken to lower the income variability associated with production risks Stable income can make the difference between resilience or business failure Two basic strategies to reduce income variability: – Enterprise diversification – Crop or revenue insurance

Self-Assessment: Review What are the basic strategies to try to reduce income variability in agricultural businesses? – A. Enterprise diversification – B. Livestock performance – C. Crop yields – D. Crop or revenue insurance.

Self-Assessment Self Assessment: Risk and Resilience in Agriculture: Production Risk If choose to make a change in operation, consider the changes: – Do you have the time, labor, capital, and equipment? – Who will buy your new product? – How will you market new product? Expect a learning curve and less performance the first year in your plan

Self-Assessment: Managing for the Right Risks in Agriculture: Production Risk Do you know your cost of production for each enterprise? ___No ___Yes Are you a high or low cost producer compared to benchmark for your area? ___High___Low Have you evaluated the risk of current or new enterprises? ___No___Yes Have you identified resources needed for new enterprises? ___No___Yes

Self Assessment: Risk and Resilience in Agriculture: Marketing Risk Knowing types of price variation for your product and watching market throughout the year can make you a better marketer Compare and contrast price with futures price, using basis (basis= cash price- futures price) Agricultural futures and options- – Can reduce risk against disastrous price moves. – With options can still take advantage of favorable price moves without margin calls

Self-Assessment Self Assessment: Risk and Resilience in Agriculture: Marketing Risk Develop a marketing plan – Set your annual marketing goals – Use family and business goals as a guide – Know cost of production and break-even price Determine your “marketing toolbox” – Sell on a cash market – Basis – Futures hedge – Option – Minimum price or forward contract

Self-Assessment Self Assessment: Marketing Risk Does your marketing plan or program: Involve the necessary people? Identify/address your financial risk? Minimize emotion in marketing decisions? Identify who is responsible for each item? Identify where prices headed and how that will affect your business? Provide for review and flexibility?

Self-Assessment Self Assessment: Risk and Resilience in Agriculture: Financial Risk Know interest rates of other lenders and load providers Shop around and visit with different lenders, particularly for small loan requirements This type of information can be used for leverage when meeting with your preferred lender

Self-Assessment Self Assessment: Risk and Resilience in Agriculture: Financial Risk Prepare the balance sheet – Assets, liabilities, net worth or owner equity Prepare income statement/profit statement Prepare cash flow statement – Summary of cash receipts (inflows) and expenses (outflows) Do a financial ratio analysis

Self-Assessment Self Assessment: Risk and Resilience in Agriculture: Financial Risk Have you calculated several key financial ratios? Use several years and watch trend for potential problems Liquidity- increasing or decreasing? Equity- increasing or decreasing? Can you meet your debt payments according to your cash flow?

Self-Assessment Self Assessment: Risk and Resilience in Agriculture: Legal Risk Agricultural contracts: – Know basic rights and duties under basic contract law Does your state require any special provisions for the type of contract you are using?

Self-Assessment Self Assessment: Risk and Resilience in Agriculture: Legal Risk Environmental laws affecting agriculture: Clean Water Act – CAFO, AFO, others State environmental laws – State water quality, permitting systems, etc. Producers should do environmental audit of their operations, learn about laws, take advantage of exemptions or safe harbors

Self-Assessment Self Assessment: Review Environmental laws are rapidly becoming one of the more important limiting factors for which of the following? Select all that apply. – A. Changing cropping systems – B. Opening new acres to farming – C. Managing crops – D. Establishing livestock operations

Self-Assessment Self Assessment Risk and Resilience in Agriculture: Legal Risk Estate planning – Only one out of three operations successfully transferred to the next generation – Develop a plan – Discuss goals of the plan with the family – Know the value of the estate for tax reasons – Consult with experts- lawyer, accountant

Self-Assessment Self Assessment Risk and Resilience in Agriculture: Legal Risk Is the contract written or oral? – Oral- Risky – Written- Resilient Are terms spelled out in detail? – Purpose, payment terms, conflict resolution and special provisions Is the contract a “general contract” – Risky? Has attorney looked at contract ? – No-Risky Investigated for any special state provisions.

Self-Assessment Self Assessment Risk and Resilience in Agriculture: Legal Risk Have you attended programs and gathered information about environmental regulations that affect agriculture in your state? Have you done an environmental audit to determine if your operation is in conflict with current laws? Have you developed a plan to reduce possible environmental hazards?

Self-Assessment Self Assessment Risk and Resilience in Agriculture: Legal Risk Have you developed goals for transferring operation? Have you discussed goals with your family? Do you have an estate plan? Have you discussed your estate plan with an attorney or other estate specialists?

Self-Assessment Self Assessment Risk and Resilience in Agriculture: Human Risk Over half of farm and ranch families have intergenerational conflicts Economic goals, business operation, and estate transfers can be blocked by unresolved family issues – “If our operation was like a business, we could fire one or two of our family members, but we cant.”

Self-Assessment Self Assessment Risk and Resilience in Agriculture: Human Risk Build skills in interpersonal communications, conflict resolution, problem-solving, decision-making and goal setting. Potential strategies: – Family meetings Regularly scheduled Strive for consensus Solve one problem at a time – Stress management techniques – If problems too complex to solve by yourself, seek professional help – Recognize the influence that “personality” has on risk management decisions Know your own personality and management style

Self-Assessment Self Assessment: Risk and Resilience in Agriculture: Human Risk Are you an at-risk family? Family meetings chaotic, disruptive, no consensus Family members interrupt each other or withdraw from family discussions Depression and anger common among family members Low trust levels, high conflict or violence

Self-Assessment Self Assessment: Risk and Resilience in Agriculture: Putting It All Together Strategic planning is important Strategic planning process should include: – Setting goals – Mission statement – Estimate cost of goals – Incorporate risk management goals into strategic plan

Self-Assessment Self Assessment: Risk and Resilience in Agriculture: Putting It All Together Incorporate risk management into daily operation of business and management decisions Self Assessment and action items in risk management Redo assessment and action plan for risk management at least annually.