C2-Lancaster Farming, Saturday, March 4, 2000
RISK MANAGEMENT ON
THE PLANNING PLANET
John D. Rutherford Jr.
Farm Management Agent
Lebanon, Berks,
Dauphin Counties
Come with me, won’t you, on
a trip to the far-away galaxy of
“Farm Business Management.”
In that galaxy is a planet
called “Business Planning.”
Business planning is made of a
number of continents which are
specific plans any business
should consider. These plans in
clude succession, future growth,
and nutrient management, but
there are others.
Of concern to this article is the
risk management plan. You will
see some aspects of this plan
may be adjacent or even include
other plans.
Before we set foot on this
planet, let’s consider why plan
ning is important. (It’s good to
start with the easy questions.)
Who would not rather deal with
a situation calmly, with time to
consult with the banker, nutri
tionist, extension agent, or
whomever; evaluate the merits
of different alternatives; and
communicate your decision to
key people (like selling the idea
to your spouse)? It is not hard to
understand where this environ
ment is more likely to produce a
good decision than making deci
sions within the hour in a high
pressure situation. As many
alternative strategies as you can
have laid out and set plans to
handle, the better your decision
making will be in those events.
And your farm should be that
much more profitable.
Risk management is the area
on this planning planet where I
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want to go with this article. Why
risk management? For a number
of reasons, risk management has
become an increasingly import
ant aspect of farm management.
Statistically, farms have been on
a general trend toward larger
size. Coupled with growth in
size has been growth in scale.
Not only are farms producing
more because they are larger,
but they have to produce more
per unit as well. They do this be
cause profit margins are shrink
ing.
Economic theory shows this
will happen when technology
makes more efficient production
possible. The risk of losing a
penny per unit of production is
of little consequence when the
margin is $2, but it gets pretty
dear when the margin is only S
cents! Farms are specializing on
fewer enterprises, focusing more
time on the specific manage
ment and regulatory aspects.
Market globalization not only
means competing with produc
ers all over the world, but also
satisfying the whims of con
sumers everywhere. Do you re
member the days when the
protests of a French crowd could
have no consequence on the
marketability of your crop?
What would happen now should
the French decide they literally
can’t swallow meat from ani
mals fed GMO grains? These are
significant risks that farmers
face today, without even men
tioning everything that can go
wrong when your livelihood de
pends on a biological process
heavily influenced by weather.
Top it off with the price interac
tions that usually move in the
opposite direction as produc-
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Risk is the possibility of harm
or loss. So anyone discussing the
“risk” of winning $lOO or win
ning the lottery is not using the
word correctly. It is not a risk to
get less than the optimal (which
is important in risk related to
marketing), but it is a risk if get
ting less than a certain price
means you have to default on a
loan.
The risks that farmers deal
with come from six different
sources. The largest source is in
production. Anything that can
go wrong in growing a plant or
animal at some time has. If that
happened to you this year,
would you be able to absorb the
loss? How do you know these
things aren’t going to happen
again? The majority of informa
tion available to farmers deals
with mitigating the various dis
eases, pests, and other setbacks
related to an organism growing
in a certain place to be market
able at a certain time.
The rest of the risks are in al
phabetical order, starting with
environmental. This is a new
one to farmers. It used to be the
barn was cleaned out when time
allowed and chemical sprays did
not exist. Now nutrient manage
ment plans must be filed and fol
lowed to ensure that manure
does not contaminate. And that
pesticides are handled with care
to promote the safety of applica
tor and the surrounding ecology.
Financial risk is a unique
source to any business. On one
hand, any impact on the farm is
going to show up in the finances,
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Betts Equipment
3139 Windy Bush Road.Rt 232
New Hope, PA 18938
215-598-7501
Hoober, Inc.
Main Street
Intercourse, PA 17534
717-768-8231
Hoober, Inc.
East Mam Street
McAlisterville, PA 17049
717-463-2191
Deerfield Ag &
Turf Center, Inc.
RR 2 Box 212
Watsontown, PA 17777
570-538-3557
Detlan Equipment, Inc
141 East Mam St
Silverdale, PA 18962
215-257-5177
Thomas L. Dunlap
Rt. 220, Mam St Exit
Jersey Shore, PA 17740
570-398-1391
so financial risk is inherent in
everything. On the other hand, if
the business has enough net
worth (enough to absorb all of
the potential loss), then there is
minimal financial risk and the
manager is free almost to ignore
the possibility of loss. For in
stance, it is only in rare cases
where we get really worked up
over losing a postage stamp.
Most of us can absorb the loss of
33 cents if a stamp is misplaced.
But we whistle a different tune
when it comes to the possibility
of our dairy bam burning down.
Legal risks entail those topics
which require a lawyer. Any
laws dealing with employees,
proper title to assets, or farm or
ganization (to name a few) must
be dealt with properly or the
possibility for loss will exist.
Marketing risk has really been
in the news these past couple
years. These risks include
having a market outlet for your
product when it is ready and
getting the necessary price out
of it. As I said earlier, the possi
bility that you will get $5 for soy
beans instead of $8 is not a risk
if unless $5 is less than you need
to stay in business. Knowing
what number you need to stay in
business is why you calculate
your own cost of production (in
stead of having someone tell you
what the state average is) and
why you keep financial records.
The final risk is personnel. As
farms grow in size, often em
ployees are hired to allow the
operator some time for manage
ment. These people may not un
derstand fully their duties nor
your equipment, or they may be
accident prone. How will you
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Eckroth Bros Farm Equip
Rd 2. Box 24A
New Ringold, PA 17960
570-943-2131
Eckroth Equipment Co
4910 Kernsville Rd.
Orefield, PA 18069
610-366-2095
Hines Equipment
RT 220, Belwood, PA
814-742-8171
Keller Brothers
R 7 Box 405
Lebanon, PA 17042
717-949-6501
1950 Fruitville Pike
Lancaster, PA 17601
717-569-2500
M.S. Yearsley & Sons
West Chester, PA
610-696-2990
Pikeville Equipment Inc
RD 2, Oysterdale Road
Oley, PA 19547
610-927-6277
keep your farm from harm
should an employee make a mis
take?
Knowing the sources of risk
helps you think critically about
the dangers faced within your
operation. This self-assessment
identifies the risks that need to
be removed, modified, or in
some other way controlled. This
assessment has to be done on a
per-farm basis because the risks
and their potential, or perceived
potential, are going to vary by
farm and by manager. Some
managers take on more risk
than others. In the U.S. econ
omy, we usually see payoffs
greater when greater risks are
taken. But some managers are
not comfortable with higher
risks, and some financial situa
tions would not withstand the
loss if the greater risk did not
payoff.
Given the conditions of the
farm and the level of risk aver
sion of the manager, the risks
can be thought of in terms of
their level of risk and frequency
of occurrence. If you see that
something is a high risk and
happens often, then this risk
most definitely needs to be ad
dressed.
Conversely, potential prob
lems that are rare in occurrence
and of little consequence when
they do could be overlooked in
most any situation. However,
there are two areas where risk or
frequency are high enough that
you must review your own pre
judices toward risk and decide if
this is one worth accepting or
also finding a way to manage.
Also keep in mind the financial
(Turn to Pago C 3)
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Stoltzfus Farm Service
Cochranville, PA
610-593-2407
Stouffer Bros Inc.
1066 Lincoln Way West
Chambersburg, PA 17201
717-263-8424
Rodio Tractor Sales
North White Horse Pike
Hammonton, N J 08037
609-561-0141
Warren County Service
Center
228 Route 94, Blairtown, N J
908-362-6916
Frank Rymon
& Sons, Inc.
RD 3, Box 355
Washington, N.J 07882
908-689-1464