Recognizing Risk

Risk Management – Lesson 1, January 2002

West Virginia Department of Agriculture and West Virginia University, Cooperating

 

 

RISK IS DEFINED AS THE POSSIBILITY OF LOSS OR INJURY. For farm families, risk might be defined as the possibility of loss or injury to a family member or the farm itself.

 

You know that as a farmer you face great risk every day. Many experts argue that no industry faces more risk than American Agriculture. Risk is more complex than a single event like a drought or some other major event either natural or manmade. It is more often a subtle and quiet, everyday situation that grows in layers as the operation responds to external forces. No two people or farm situations carry exactly the same types of risk, nor the same amount of risk. And surely, no two people or farming operations possess neither the same capacity to tolerate nor the ability to manage, and eliminate risk. Importantly, most producers and their families aren’t aware of the magnitude of the risk they face. As farmers become more involved with their operations and their families and as they mature and “get used” to risk, often they discover they have been carrying great risk for many years and that has become a stress with prospects even more damaging that the risk itself.   

 

There are really only three ways to deal with risk. Farmers can avert risk (humans prefer certainty to risky outcomes), diversify risk (spread it over a larger base or more enterprises), and insure against risk (pooling occasional individual events against a larger pool).

 

 First farmers must first learn to recognize the risk in their lives and operations. Next they must begin to evaluate the level of risk they are willing to shoulder and identify the tools available to them to deal with risk.

 

Agricultural risk is generally categorized into five types. The first is Production Risk, where farmers deal with weather, technology, and management skills to assure a crop and an acceptable yield. Next is Price Risk, the most fickle and frustrating facet of agriculture where external forces play a major role in the operation’s well being. Financial Risk is third; interest rates and loan repayment capacity needs no further recognition as a risk.  Legal Risk for West Virginia farmers may include our neighbor’s opinion of our fertilizer choices and use of manure, as well as, fences, and product liability. Last is Human Risk. How we allow our operations to dictate our health, our families’ and employee’s security,  our retirement and long term plans defines this very important risk factor.

 

This exercise will help each of you to become familiar with the five categories of risk. By completing this questionnaire you will attain an individual risk management score. This score will mean nothing to somebody else because each of us has a different level of risk and a different tolerance to it. It is hoped that each of you will respond to each question carefully. When it is completed, please add up your score and record it at the bottom. Please record your score (no name or anything else) on the last sheet attached to your questionnaire and kindly turn it in. This will help us at West Virginia University to “get a feel” for the group’s level of risk and its attitude toward it. Next month we will share the numbers with you. And next year will ask you to do the same exercise and you will be able to compare your results to see if you have changed your number.

 

Risk Management Skills and Awareness Assessment

 

Exercise 1:

Mark below if you have done the following “a lot”, “some”, or “not much.”

Give yourself 1 point each time you answer a lot.

                       2 points each time you answer some.

                       3 points each time you answer not much.

_____ Diversified production by raising both crops and livestock.

_____ Diversified by raising two or more livestock species.

_____ Marketed livestock at off-season, non-peak times, to match high price or avoid

           market glut.

_____ Added value to your livestock.

_____ Hired fieldwork done rather than buy a piece of equipment.

_____ Hired fieldwork to improve timeliness of crop operations.

_____ Made changes to extend graze to reduce dependence on harvested feed.

_____ Pre-paid or contracted inputs ahead of when you need them to lock in a good price

           or manage taxes.

_____ Bought crop insurance.

_____ Maintained a larger open line of credit than you need, just in case.

_____ Participated in the government farm programs.

_____ Leased equipment rather than buying it.

_____ Rented equipment rather than buying it.

_____ Joined a marketing group or alliance.

_____ Consult with your lawyer about your liability.

_____ Refinanced a loan to take advantage of lower interest rates.

_____ Soil test.

 

_____ SUB TOTAL  Carry this total to the next page


Exercise 2:

 

How many individual sales of your major crop do you make in one year?

 

Individual Sales Points

               One                             1

               Two- five                     2

   Six to ten                     3

   Eleven to fifteen           4

   More than fifteen         5

Choose one score _____

 

Which of the following best describes your approach to planning?

              Approach               Points

 

Written plan                       4

Have a few ideas               3

Thought about it                 2

No planning                       1

                                                                                    Choose one score ______

 

 

Mark one point for each of the following techniques you use.

_____ Business plan.

_____ Cost per Unit of Production.

_____ Cash Flow Statement

_____ Accountant
_____ Computer for records and market discovery

_____ Financial Ratios

_____ Financial and production consultant

 

_____ SUB TOTAL

     Total of three scores on page 2 _____

 

 

Page one total _____  minus  page 2 total  _____  equals  your score ______.

 

 

 

How did you score?                               35 or more one star

25-34           two stars

19-24           three stars

18- less       four stars

Keep these three pages but please record your page totals individually and your final score on the following page, tear it off and kindly turn it in for comparison.      No names please…  thank you!

 

 

Page 1 score ________

 

Page 2 score ________

 

 

Total score page 1 minus page 2.

 

____________ Score