|
|
 |
PAGE 72 / 87 |
 |
Unit 3: Managing the Farm/Ranch Business for Long-Term Success
Risk Management Strategies
“If you have identified risks with your business, the next steps are to either eliminate the risks, transfer them to someone else, or, if this is not possible, buy insurance to cover them.” – Neil Hamilton, The Legal Guide for Direct Farm Marketing.
Farmers and ranchers encounter a variety of production, marketing, financial and human-resource-related risks. All farmers are exposed to weather extremes, interest rate fluctuations, and the effects of economic downturns.
Some important risk management strategies are summarized below. Click on each item below to learn more:
-
Contingency Statements: Contingency statements – statements about how to manage for rapid growth or cope with problems – are a low-tech, insightful risk management tool that require only the time needed to discuss and prepare one. Lenders appreciate seeing even simple contingency statements, as they indicate good management.
-
Crop and Disaster Insurance: On the production side, traditional crop insurance may not be available if the farmer is producing non-commodity, specialty products. Likewise, for a diversified sustainable farm/ranch operation, one crop insurance policy may not be adequate. Contact the Risk Management Agency to learn about insurance programs such as AGR-LITE, which insures whole farm “revenue” rather than individual enterprises, or the Non-insured Crop Disaster Assistance Program – NAP – which provides financial assistance to producers of non-insurable crops when low yields, loss of inventory, or prevented planting occurs due to natural disasters. Learn more about crop and disaster insurance at USDA Risk Management Agency.
-
Diversification: Farming with a diverse mix of crops and/or livestock can help mitigate production, marketing and finance-related risks. What may not be obvious, however, is that diversification also helps mitigate marketing and finance-related risks. Diversity ensures there will almost always be products to market: If one crop fails, another may survive or even thrive. And, by spreading the risk among a variety of enterprises, farmers and ranchers can sometimes protect their bottom line. Diversification also applies to marketing. Recall the Thousand Hills Cattle Company’s strategy: diversify its customer base so that no one client “owned” the business.
-
Farmer Networks: Many farmers, especially those who are pioneering alternative production/marketing practices, have formed learning groups or networks to exchange information through field days, meetings and one-on-one mentoring.
-
Liability Insurance: Comprehensive Farm Liability insurance provides coverage for family, employees and third-party or customer accidents that occur on the farm during work hours, the U-pick season, field days and other events. Moreover, product liability insurance is a must for any farmer or rancher interested in producing and marketing processed or value-added items. Under the Consumer Protection Act 1987, all food processors – from big manufacturers to one-person kitchens – are legally responsible for any damage or injury caused by their products.
-
Marketing Plans: One of the best risk management tools is a marketing plan, especially when direct marketing or processing. Farmers should spend time getting to know their customers and competition, prices, expenses and handling and packaging laws. Without this information, the farm/ranch business is doomed to fail. These and other issues were discussed in detail in Unit 2 of this course.
-
Recordkeeping: Good recordkeeping is an important tool for managing risk. Financial, production and marketing records enable farm managers to track progress toward goals; monitor profitability; apply for credit, crop insurance and disaster assistance; prepare taxes; complete a marketing and/or business plan; and apply for various types of certification. Recordkeeping is central to almost every aspect of managing a farm business.
-
Farm Transfer and Succession Planning: Farmers easily focus on the day-to-day or seasonal aspects of managing the farm business. But they also need to think about the stability and sustainability of the farm into the future. This long-term view is another component of managing risk. Some questions that highlight this perspective: What would happen to the business if the farmer should become incapacitated or die suddenly? What are the farmer’s thoughts about retirement and their level of involvement in the business as they get older? Are there any family members interested in taking over the farm some day and will they be in a good position to do that? More on this topic is in the last section of this unit.
-
Health Insurance: It might be easy to skip over this topic, especially since the Affordable Care Act now mandates that every American must have health coverage. But it is important to emphasize that having health insurance is extremely important, not just for personal reasons, but also for the farm business. In addition to regular health issues that arise as part of life and aging, farmers are also at higher risk for accident and injury than the general population. An accident or some kind of long-term illness can be extremely costly and if the farmer does not have adequate health coverage, the stability of the business could be affected. Health insurance is expensive, but farmers and ranchers should at least carry basic coverage (catastrophic) with a high deductible for themselves and their family members.
|
