developing a risk management plan paul e. patterson and larry d. makus university of idaho...
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Developing A Risk Management Plan
Paul E. Patterson and Larry D. Makus
University of Idaho
Department of Agricultural Economics & Rural Sociology
Develop A Farm Plan
A farm plan is the umbrella under which other plans reside
Risk management is a component of each plan, not a separate plan
A Farm Plan Includes:
Goals & objectives Land use plan Crop plan Livestock plan Resource inventory Financial statement Budgets Income statement Supporting data
Planned vs Actual
Plans and decisions are made based on expectations
Evaluation should compare actual to expectations
Risk
Risk is the possibility that an outcome or event will not meet planned expectations
Risk Management
Risk management integrates production, marketing & financial decisions
Risk management is a planning process where you assemble and assess information
Every management decision carries risk management implications
Risk Management Requires
Understanding of Your financial situation
Understanding sources of risk and potential risk
Understanding of risk management tools
Risk Management Includes:
Evaluation of alternative plans & risk management strategies
Implementation of the plan
Monitoring the plan
Developing probabilities to formalize risk assessment
Probability
Probability is the chance orfrequency of an event
Probabilities quantify the chance of an event occurring
Probability
What is the probability that soft white wheat at Portland will be under $4?
What is the probability that your wheat yield will be below your 10-year average?
ProbabilityProbability
0%
5%
10%
15%
20%
25%
$2.75 $3.25 $3.75 $4.25 $4.75 $5.25
Price
Cumulative ProbabilityCumulative Probability
0%
20%
40%
60%
80%
100%
$2.75 $3.25 $3.75 $4.25 $4.75 $5.25
Price
Risk Assessment
Assess your risk bearing capacity
How much risk can you tolerate?
How much risk protection can you afford?
How much risk are you willing to accept
Managing Production Risk
Crop selection Enterprise diversification Spatial dispersion Cultural practices Preventative maintenance Risk Reducing technology Insurance
Managing Price Risk
Multiple sales
Contracts
Hedging
Market outlook
Managing Revenue Risk
Income Protection: USDA, RMA
Crop Revenue Coverage: private
* IP and CRC combine price & yield protection into a single program
Income Protection
Protects against a decline in actual revenue compared to expected revenue for a given year
Price protection varies each year
Crop Revenue Coverage
CRC Provides: Revenue guarantee, similar to Income
Protection Coverage Also provides replacement coverage,
allowing for increased coverage if price increases
Managing Financial Risk
Factors to consider Debt structure Leverage Resource control Business organization Production efficiency Insurance Reserve funds Off-Farm income
Managing All Sources of Risk
Education
Environmental awareness
Evaluating past decisions
Why Managers Don’t Plan:
Involves detailed thought & analysis
Reminds managers of uncertain future
May force manager to seek assistance
Forces families to address conflicts
Basic Risk Management Concepts
There is no one “Best Strategy” Balance the potential for a profit
against the potential for a loss The key to successful risk
management is taking the right risks Risk management does not eliminate
risk