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Risk management: Big picture first, tactics second

Steve Maier Published on 19 September 2012

A discussion of risk management can get very complicated very quickly. It’s easy to be overwhelmed by all the tactics at your disposal. What’s the right strategy? What has the best potential for long-term success?

But perhaps it doesn’t have to seem so complicated. As I was preparing to write this article, I did a little research and thought about what it actually means to practice risk management.

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I came upon the following definition that gives a good summary of this business tool: “Risk management is the process of gauging or assessing risk and developing strategies to manage it. It is a process of prioritizing risks with the greatest potential for loss with the greatest probability of occurring.”

The term risk management typically is associated with strategies meant to maximize the price of the commodities you sell. But when you think about risk management in terms of this definition, then we are all risk managers throughout our everyday lives. Risk management encompasses a much broader portion of your operation beyond the net price you receive for milk or soybeans.

Throughout my life, I’ve had the opportunity to view risk management in action from a variety of different perspectives. I grew up on a family dairy farm in northwest Wisconsin, graduated college with a degree in animal science, worked in the feed and genetics industries, farmed briefly on my own and eventually landed a position as an agricultural loan officer with a community bank. Most recently, I ventured into the field of financial consulting with Agri-Business Consultants.

In all these experiences, I’ve seen some common denominators between the “good managers.” If you get an insider’s look at good managers’ financials, you’ll repeatedly see slight variations of the same theme occurring throughout those operations.

1. They pay attention to detail in all aspects of the operation, regardless of farm size. Growing up, I was told that hard work and long hours will generate cash flow but profits are found in the details.

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2. Second – and closely tied to the first point – is record-keeping. As a lender, I often saw that the operations with timely and accurate records always found their way to the top end of my loan portfolio. If you have no system of records in place, you have no reasonable idea if a decision is beneficial or not. When you have up-to-date information, you are able to make the important decisions with confidence and accuracy.

In terms of risk management, if you are contracting milk and have no real idea of your cost of production, you are no longer a hedger in the market – you are a speculator. Forward contracting of your milk at just below your cost of production can prove to be a challenging business model for even the best managers.

3. Another trait of successful risk managers is a willingness and ability to communicate with others. Nutritionists, veterinarians, market advisers, insurance agents, your loan officer, extension personnel, financial consultants and other producers are all examples of people who can provide information to assist in the decision-making process.

Regardless of farm size, all good managers have a team of go-to people to offer insight and perspective in all areas of the operation. Some farms have adopted a team meeting approach with the decision makers present as well as key influencers.

Form a group of trusted advisers and expect value from them beyond the delivery of product to your farm. Remember, not everyone who comes to your door is giving you sound advice – some of them are just talking.

As your business grows in size or value, be willing to grow with it. When I was a lender, nothing irritated me more than a comment like: “Well, that’s the way we always did it.” Doing things the way they were always done isn’t necessarily wrong as long as you recognize the world around you is always changing. In order to manage the risks you face in today’s environment, you need to adapt and adjust your course over time.

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Next comes the topic of transition. Know who in the operation plays the role of the main decision- maker. If something happens to that person, do you know how it will affect your operation? As a lender, this was a risk that I always wanted addressed.

Your lender in most cases will be satisfied if you have a life insurance policy in place that will repay most or all of your debt. What are the risks to your partners or spouse and your employees? Have you discussed this together? Do you have a plan in place? Keep in mind, planning for a transition in management is much easier when all parties are present.

Lastly, when you are managing the many risks to which your operation can be exposed, have an idea of where you are going and how you plan to get there. I am sure you have heard some variation of this phrase: “If you don’t know where you’re going, then anywhere will do.” Whether it’s through university or extension resources, industry peers or fellow producers, you have access to an abundance of educational opportunities to gain further insight into where you may want to direct your operation.

The take-home message here is that risk is part of every business, regardless of the size, financial position or type of business. The small things you and your family do on an ongoing basis tend to add up to success. Determine what you ultimately want the big picture to be. From that viewpoint, you’re ready to move forward with the right tactics that will contribute to your farm’s financial success. PD

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Steve Maier
Financial Consultant
Agri-Business Consultants LLC

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