Developing A Risk Management Plan

1. Developing A Risk Management Plan Paul E. Patterson and Larry D. Makus University of Idaho Department of Agricultural Economics & Rural Sociology

2. Develop A Farm Plan • A farm plan is the umbrella under which other plans reside • Risk management is a component of each plan, not a separate plan

3. A Farm Plan Includes: • Goals & objectives • Land use plan • Crop plan • Livestock plan • Resource inventory • Financial statement • Budgets • Income statement • Supporting data

4. Planned vs Actual • Plans and decisions are made based on expectations • Evaluation should compare actual to expectations

5. Risk • Risk is the possibility that an outcome or event will not meet planned expectations

6. Risk Management • Risk management integrates production, marketing & financial decisions • Risk management is a planning process where you assemble and assess information • Every management decision carries risk management implications

7. Risk Management Requires • Understanding of Your financial situation • Understanding sources of risk and potential risk • Understanding of risk management tools

8. Risk Management Includes: • Evaluation of alternative plans & risk management strategies • Implementation of the plan • Monitoring the plan • Developing probabilities to formalize risk assessment

9. Probability • Probability is the chance orfrequency of an event • Probabilities quantify the chance of an event occurring

10. Probability • What is the probability that soft white wheat at Portland will be under $4? • What is the probability that your wheat yield will be below your 10-year average?

11. Probability

12. Cumulative Probability

13. Risk Assessment • Assess your risk bearing capacity • How much risk can you tolerate? • How much risk protection can you afford? • How much risk are you willing to accept

14. Managing Production Risk • Crop selection • Enterprise diversification • Spatial dispersion • Cultural practices • Preventative maintenance • Risk Reducing technology • Insurance

15. Managing Price Risk • Multiple sales • Contracts • Hedging • Market outlook

16. Managing Revenue Risk • Income Protection: USDA, RMA • Crop Revenue Coverage: private • IP and CRC combine price & yield protection into a single program

17. Income Protection • Protects against a decline in actual revenue compared to expected revenue for a given year • Price protection varies each year

18. Crop Revenue Coverage • CRC Provides: • Revenue guarantee, similar to Income Protection Coverage • Also provides replacement coverage, allowing for increased coverage if price increases

19. Managing Financial Risk • Factors to consider • Debt structure • Leverage • Resource control • Business organization • Production efficiency • Insurance • Reserve funds • Off-Farm income

20. Managing All Sources of Risk • Education • Environmental awareness • Evaluating past decisions

21. Why Managers Don’t Plan: • Involves detailed thought & analysis • Reminds managers of uncertain future • May force manager to seek assistance • Forces families to address conflicts

22. Basic Risk Management Concepts • There is no one “Best Strategy” • Balance the potential for a profit against the potential for a loss • The key to successful risk management is taking the right risks • Risk management does not eliminate risk