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Managing risk in a risky environmentManaging risk in a risky environment

Policy Report: Manage each area of risk successfully despite the economic or policy environment.

Bradley D. Lubben

August 2, 2018

5 Min Read
THE UNKNOWN: With the ag policy world in a state of flux, it can be difficult to assess what is at risk, and what programs or policies may be there to help manage that risk.

Agriculture is a risky enterprise. We’ve known that for decades, or even centuries. Federal farm policy has historically played a role in helping producers manage that risk. But we seem to be living in very interesting times when policy itself can be the source of risk, or at least a source of substantial uncertainty.

The summer months have been full of policy developments and uncertainty. Farm bill legislation passed in each chamber of Congress should be progressing through conference committee deliberations, but the outcome of those discussions and the direction of a final farm bill for potential passage as early as September remains a question. Bioenergy policy is also a source of uncertainty, with conflicts over the Renewable Fuels Standard obligations and small-refinery exemptions that have effectively and substantially reduced the renewable fuel blending requirements.

And then there is trade, where we have had escalating trade tensions and dueling tariffs reducing U.S. ag export opportunities, commodity prices and income projections. However, now there is also the promise of federal assistance coming to producers as early as September, along with possible progress in trade talks with the European Union and NAFTA. The trade conflict has certainly impacted commodity markets, where major crop and livestock commodities have fallen as much as 20% or more in the wake of strong production expectations and falling export demand.

The $12 billion assistance package announced by USDA promised help in the form of direct payments to producers of affected commodities, such as corn, soybeans, sorghum, wheat, cotton, dairy and hogs.

Beyond direct income support for producers, USDA plans to help support market prices through commodity purchases of surplus commodities, such as fruits, nuts, rice, legumes, beef, pork and milk, and distribute those commodities through food banks and nutrition programs. USDA will also expand trade promotion efforts, presumably building on current trade promotion programs to develop new export markets for U.S. farm products.

With the agricultural policy world seemingly in a state of flux, it can be difficult to assess what is at risk, and what programs or policies may be there to help producers manage that risk. However, some lessons learned from ongoing risk management education efforts are a good reminder that producers need to be aware of risk and of the risk management tools that they can use daily on their farm or ranch regardless of or even in spite of the ever-changing policy world.

At the North Central Extension Risk Management Education Center at the University of Nebraska, we are constantly focused on producer risk management needs and opportunities to support producer education efforts across our region (from Kansas to North Dakota to Michigan and Ohio and back). We work in concert with other regional centers across the country to fund local programs that deliver producer-focused education, help producers achieve real risk management results and improve farm profitability and business success.

A recent meeting of colleagues from the various centers included a tour of a progressive, nearly 1,000-cow dairy operation in Wisconsin. What the tour showed us was an operation that recognized and managed every facet of risk in spite of the ongoing challenges around it, including the dairy policy and trade conflict that has lingered with Canada for some time.

The risk management centers’ focus on risk in agriculture includes the full range of production, marketing, financial, legal and human risks. The dairy, or more specifically, the owner-operators of the dairy, have been astute in managing each area of risk and optimizing or positioning the operation for profitability and continued success.

In the area of production, the dairy has worked extensively on selecting optimum genetics with the use of genomic identification and evaluation tools, producing a herd that exceeds milk quantity and quality standards across the board. They also have worked with their records and data on individual cows to optimize milking groups and maximize the efficiency of their traditional double-twelve parallel milking parlor to milk nearly 1,000 cows three times a day.

To manage market risk, the operation invested in expanded grain-handling facilities to better manage their feed needs and the wide bid-ask spread between what they produce on the farm every fall, but need to buy in the local market year-round.

The production efficiency and quality has helped the operation maximize revenues and deal with the financial impacts of a market downturn, but the operation is also managing long-term financial plans with a farm transition plan that includes non-family successors now involved in the operation as partners and part-owners. The dairy devotes effort to managing the legal risks of everything from environmental and worker regulations to product quality, and goes beyond the requirements to engage in advocacy as spokespeople for agriculture.

And, in the human risk area, it was noted how the dairy excelled in part because of its quality workforce. The lesson learned was that rewarding the quality workforce, not necessarily with performance bonuses that could incentivize short-term short-cuts, but with good jobs and working conditions was critical to overall success.

In sum, the lessons to be learned from getting outside of the local area or away from your own operation could prove very applicable to every farm or ranch. Managing success for the overall operation means managing each area of risk successfully despite whatever the current economic or policy environment is. Devoting time and effort to risk management, including education, analysis and decision-making to implement new and improved practices is worth the investment.

The fundamental purpose of the Extension Risk Management Education (ERME) program nationally is to support local programs that reach producers with the education they need and demand. Those programs, in turn, help producers gain the knowledge and skills to understand and analyze risks facing their operations and to develop and implement the practices to address them.

The North Central ERME Center has been awarded funds from USDA since 2001 to deliver this support in the region and will be announcing its next round of funding opportunities in September for educators and groups looking to deliver education to producers in the coming year.

For those interested in delivering education or the results of 375 funded projects to date, we invite you to visit ncerme.org and the national program at extensionrme.org.

Lubben is an Extension policy specialist at the University of Nebraska-Lincoln.

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