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Managing risk and opportunities in farm business

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Minimize your distractions and look at the bigger picture.

The other day, an agriculture producer made a very compelling comment, “With so many risk factors out of our control, what are some tips that a producer can use to manage risk, but also position for opportunities?”

In an inflationary environment, risk and opportunities are often magnified.One first has to isolate the controllable elements and uncontrollable variables. For example, geopolitical military actions, whether in Moscow, Beijing, Brussels, or in Washington D.C., can appear to be overwhelming. Inflation and central bank action in the U.S. and abroad can quickly alter prices, costs, and valuation of assets whether it is stocks, bonds, residential real estate, or farm and ranch land. One has to manage around these elements with strategies and then examine the unintended consequences and potential outcomes.

Financial spreadsheets with a trend analysis can be used in conjunction with an advisory team to bring objectivity to emotional events. On the other hand, the controllable variables, whether it is executing a risk management plan or marketing and financial strategies, need focus with close monitoring.

For example, the level of crop insurance maintained or the business’ ability to handle a three percent rise in interest rates can be mapped out with different sets of scenarios and outcomes. A weather management plan could be focused on inputs sourced from around the globe, region, or area and how weather could impact their prices. If one knows the break even points and cost of production, for each enterprise if it is a diversified operation, a more objective strategy versus emotional actions can be executed.

Producers who are financially liquid with extra cash or those that can buy ahead to source inputs, have extra parts on hand, or store extra diesel fuel can hedge their risk for possible disruptions and supply chain issues. Rationing was a common term during World War II. In the late 1970s, fuel fill ups were limited to odd/even days, which required one to think ahead and have a backup reserve.

Recently at a business meeting, an individual sized up managing risk and opportunities in this economic environment. Minimize your distractions and have a larger focus and priority on the spending strategies that will increase your equity. Another comment that was very appropriate was to not put all of your eggs in one basket. Should you decide to do it anyways, you better have a sturdy basket!

Source: David Kohlwhich is solely responsible for the information provided and is wholly owned by the source. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. 

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