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Unit 3: Managing the Farm/Ranch Business for Long-Term Success
RISK MANAGEMENT
The USDA’s Risk Management Agency recognizes five distinct risk areas for farm and ranch businesses. Rollover the risk topics below to learn more and to consider some of the unique challenges faced by farmers and ranchers engaged in sustainable agriculture. While farmers acknowledge production risks common to agriculture, many don’t spend enough time exploring other market, labor, legal and financial risks. Encourage farm business owners to sit down with their farm team to identify such risks and then develop a risk management strategy.
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Production Risk: Production risk is that which adversely affects yield and quality. Examples of production risk include weather, insect and disease pests, wildlife, equipment failure, input quality and neighboring production practices such as chemical drift. Perhaps the greatest production risk faced by any farmer is lack of knowledge and/or experience. Without a thorough understanding of soils, fertility and pest management, it’s quite difficult to grow healthy, high quality crops or attain financially-profitable livestock productivity.
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Marketing Risk: Marketing risks adversely affect sales volume and revenue. Examples include price volatility, competition, changes in customer preferences, poor communication skills, inadequate storage, legal or food-safety responsibilities, distribution expenses, and lack of marketing and handling knowledge. Farmers engaged in sustainable agriculture, particularly those involved in direct marketing, processing, or some other value-added enterprise, are particularly vulnerable to marketing risks.
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Human Resource Risk: Human resource risks may adversely affect productivity and management. Examples include conflicting goals within families, untimely loss of labor, lack of skilled labor, injury or illness, lack of management experience and divorce.
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Legal Risk: Legal risk may adversely affect business and personal liability. Legal risks include federal and state environmental regulations, tort or personal liability, zoning requirements, statutory laws related to sales and income tax, social security regulations, food safety and handling responsibilities, federal OSHA farm safety regulations, unemployment workers compensation laws, Migrant and Seasonal Agricultural Workers Protection Act provisions and estate and farm planning issues.
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Financial Risk: Financial risks can affect just about everything, including profitability, cash flow, loss of off-farm employment, equity and borrowing capacity or credit. Common financial risks include interest rate fluctuations, income and property tax increases, input expense increases, poor credit history, little or no operating capital, seasonal cash flow, changes in family living expense and short-term lease arrangements.
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