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The Importance of Risk Management

 

A lender who attended one of my recent webcasts asked me two very interesting questions:

  • How important is risk management going to become in the ag industry?
  • What should the ag lender's role be in providing risk-management tools to farmers?

First, the importance of risk management will increase in the future. With escalating volatility of input costs and revenue streams, one slip-up in risk management can set your business back for half a decade. While volatility in the extremes can be very intimidating and difficult to get your arms around, it can present unlimited opportunity if managed in an objective manner.

Knowing one's cost of production with different expense structure scenarios can be the foundation to lay out the necessary hedging, options and crop-hail insurance programs that meet your personality and business risk profile.

Concerning interest rate risk, it is imperative to know how your excess margin would be impacted with a 1%, 2% or 3% increase in interest rates. Remember, the Greek interest rate doubled in 60 days! While I am not implying the U.S. is like Greece, political stalemates at the federal level can raise the eyebrows of foreign creditors.

I believe the ag lender’s role is to provide educational venues that focus on risk management. Some lenders have products and services that can assist in the development of a risk management plan. The lenders’ role is to provide the information, options and alternatives, while allowing producers to “pull the trigger” and make decisions to execute strategy.

 

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.

TAGS: Management
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