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Corn+Soybean Digest

Risk Management That's Sized To Fit

When times were simpler, you had an adequate risk management program if you bought crop insurance and contracted enough grain to cover your production costs.

Not so anymore - though slicing weather and marketing risks is still an important key to risk management.

Risk exposure today, however, has entered a host of new arenas. And the consequences go far beyond lost crop income.

"Farmers need to think in terms of an integrated approach to risk management that includes business, family and personal goals and missions. It's much more than just marketing," says Dave Kohl, Virginia Tech.

Kohl is a high-energy economist who travels farm country annually, delivering his message on the future of agriculture and how different farmers fit into it.

"In the 1960s and 1970s, risk management focus was more on inflation, interest rates and, particularly, financial leverage," he says. "In that era, risk centered on production and the mechanical and chemical technology that applied to it. There was a quasi-global perspective with some political risk."

In the new era of risk, many of the categories remain, but the focus has shifted. Technology, for example, is more and more related to the information-based society rather than production.

The risk management issues you face will be determined partly by the size of your operation. Kohl categorizes farm businesses as megafarms and large family farms (5% of all farm operations) with annual sales exceeding $400,000; "tweener" farms (25% of all operations), those with annual incomes from $50,000 to $250,000; and "lifestyle" farms (70% of the total) that rely on off-farm income to support the business.

He developed risk management checkups, shown at left, for farmers in each category to help them analyze their ability to handle risk. Areas that you score low in (2 is lowest, 10 is highest) are areas where your operation is at risk. They need attention.

Environmental issues have introduced risk management concerns that didn't exist a generation ago.

"On bigger farms, particularly in livestock, we're going to see industries migrate to the least risky areas," says Kohl.

Possibly the biggest risk facing the large producers is labor, including family workers. A lot of the risk centers around the employers and their ability to manage labor, according to Kohl.

"Many of these owners have never had experience managing people, but their operations are becoming so complex that they have to manage others."

Another "new era" risk is public and political posturing at the international, national, state and local levels.

"On bigger farms, there's a tendency to market across the country and outside of it," Kohl says. "Any type of political or public pressure can change your whole game plan. They have a larger scope of risk than your tweener or lifestyle farms."

Time management is a risk faced by farmers of all sizes.

"I've seen a number of these big farms get wrecked because they are just working too much. If you spend more than 3,000 hours working or managing a farm and another 500 hours outside the farm with other church and organizational activities, either the farm goes down, the family goes down, or there are mental, spiritual and health problems," Kohl says.

"You just burn out. That's across the line, regardless of size. It cuts across all cultures." Technology and information affects different-sized operations in different ways.

"It's giving the large guys a competitive edge. Just as some soybeans growers produce a certain bean for an Asian market. They can access the market and meet its demands with the next crop. For part-time farmers, technology concerns deal more with their ability to make money off the farm so they can enjoy life on the farm."

Of course, financial risk is a part of every farmer's business.

"For the megafarms, it's called profits and earnings - it's what drives the business," Kohl says.

The part-timers are trying to minimize their loss and maximize their lifestyle. Their risk management is having an outside source of income.

"For the tweener, the basic issue of finance is having enough on-farm or off-farm income to give them a satisfying standard of living. That's where you come back to this integrated approach. A lot of the tweener farmers are throwing their hands up today because they can't generate enough profits to support the business and the family."

As you work your way through the risk management checkup, you need to share it with your family, lender, accountant and consultants, says Kohl.

"Regardless of farm size, you need outside expertise and you should have them all participate in evaluating your business."

It takes time to put a total risk management plan in place.

"You won't see instantaneous results, particularly on some of the softer-type issues," Kohl says. "It's different than a crop consultant recommending a new hybrid or fertilizer program that results in a 5-bu increase."

For ways to better manage those key areas of crop prices and weather risks, study the articles within this special report and the upcoming one in our February issue.

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