Resources on Risk Audits
- Enterprise diversification (not only reduces weather risk, but price risk)
- Geographical diversification
- Crop insurance
- Contract production (the buyer supplies inputs and expertise)
- Genetic choices
- New technologies such as precision farming; vaccines
- Hire experts such as crop scouts or veterinarians
- Buy from reputable sources
- Be sure machinery and labor are sufficient to do field work in a timely manner
The past two years have brought price risk to the forefront. Another sales risk has reared its ugly head—counterparty risk (of buyer going out of business or deciding not to fulfill your contract). "Counterparty risk falls in the category of low probability but high consequences—and it likely is noninsurable,” says Boehlje. "The VeraSun bankruptcy is a perfect example where producers delivered on grain contracts but were not paid, basically becoming the company's bankers, but without the recourse a bank might have. Alternatively, in the case of Pilgrim's Pride, producers built chicken buildings only to be told plants were closing and their production would not be needed in the future.”
- Spread sales over the marketing year
- Develop a marketing plan
- Add to your sales and risk-management strategy toolbox
- Hire a marketing service if necessary
- Consider revenue insurance
- Consider contract production
- Be careful about prepaying for inputs
- Be careful about deferred pricing on sales
- Sell to more than one buyer (and/or buy from more than one supplier)
According to USDA's Risk Management Agency, financial risk has three basic components: the ability to meet cash-flow needs in a timely manner; the cost and availability of debt capital; and the ability to maintain and grow equity. The keys to success in this arena are sound planning and financial control.
- Make sure your financial records are detailed enough and keep them up to date. Today, more farmers are moving to enterprise accounting to help them assess profitability
- Interest rate risk. By keeping your credit rating high and debt-to-asset ratio low, you may be able to capture a lower rate
- Liquidity/cash flow. Plan the timing of expenses and income
- Insurance to protect income--including life, disability, health, etc.
- Understand all legal documents before you sign—consult an attorney if you need to.
- Pay attention to family living costs and include them in cash-flow projections.
- Consult a lawyer or university source about business structure, estate planning, etc.
- Make sure you understand laws regarding employees, environmental liability, and damage caused by spraying or other ag practices
- Be aware of potential liability issues that may arise regarding accidents on your property
- Engage family and employees by involving them in the decision-making process
- Train more than one person for every job
- Prepare successors
- Insure key personnel for injury as well as death
- Make a will and other documents to spell out what will happen to the business
- Review business and ownership structures to assess the effects of divorce
- Be careful in hiring immigrants to be sure you are acting legally