Building a Risk Management Plan

Farm Futures magazine published the following list of the top ten reasons why farmers don’t actively manage agricultural risk. Do any of these strike a chord with you?

As much as farmers have heard about the need to do a better job of analyzing their risks, developing a business plan, and honing marketing skills, the number of farmers who have taken the first step is very small. In a survey of 960 readers conducted by Farm Futures, only about 5 percent are using available tools to manage production and financial risks.

So, why haven’t the other 95 percent signed on? At least four reasons come to mind right away, which may help explain why producers are “stuck.”

1. Resistance to change. In what may be the ultimate irony, learning about risk management seems risky itself. It involves changing the way you approach decisions and the way you do business. If you believe that change is unnecessary, the risk management advice you’ve received in the past probably stung for a moment then blew past you like an arctic chill.

2. Too many decisions, not enough time. The variety of risk management tools can be a curse as well as a blessing. Good tools incorrectly used or poorly understood can ruin an operation. Ongoing risk management and education will be necessary to stay competitive.

3. Old fears die hard. Despite the fact that thousands of people use futures and options everyday to protect themselves from price risk, distrust of the futures industry still runs deep in the hearts of many farmers. The crop insurance industry has also struggled to gain farmer confidence. Both industries are working with educators and farm organizations to increase trust and understanding.

4. The check is in the mail. Last but not least, up until now the Federal farm program absorbed some of the harsh realities associated with farming. The Federal Government assumed part of the production risk by making annual disaster payments. For the most part, those have been replaced with subsidized crop insurance. In the past, part of the marketing risk was reduced by annual price support payments. The safety net was held by Uncle Sam. Now, private sector alternatives to government programs must be understood and used.

In today’s marketplace, individual members of the financial, futures, and crop insurance industries offer producers many complementary risk management tools. For producers, the reward for adopting risk management strategies may well be survival.

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