Risk Management for Organic Producers

Organic Oklahoma 2015• OSU/OKC

• OSU-OKC Student Center 900 N. Portland Ave.

Oklahoma City, Oklahoma

January 27, 2015

Merritt J. Taylor

merritt.j.taylor@okstate.edu

James W. Shrefler

jim.shrefler@okstate.edu

• In risk management, the focus is on reducing variability in net income

•NOT INCREASING NET INCOME!

• Income stability ensures that producers can meet personal and business obligations.

Critical to start thinking of risk management strategies before committing to being a producer/marketer

Reducing Risk May be Costly

Less Risk

vs

Higher Returns

* These two do not often go together

• Age• Family Status• Debt Level• Psychological Makeup

Factors That Effect a Person’sRisk Tolerance

Five Sources of Risk for Specialty Crop Producers

1. Production

2. Marketing

3. Financial

4. Legal and Environmental

5. Human Resource /Personnel

Some of the Risks from RMA Web Site:http://

farm-risk-plans.rma.usda.gov/index.aspx?action=riskman.home

• Production Risk: Managing | Diversification, Alternative, and Sustainable Agriculture | New Technologies and Inputs | Crop Production | Crop and Livestock Insurance

• Marketing Risk: General Farm Marketing | Marketing Tools | Direct Marketing | Livestock and Dairy Marketing

• Financial Risk• Human Risk: Personal/Family | Employees | Pesticides• Legal Risk: Business Organization | Renting and Leasing |

Contracting | Environmental | Taxes | Bankruptcy | Succession Planning

Production Risks(Major Sources)

• Weather (drought, “excessive heat {2011}”, freezes, wind, excessive rainfall at harvest, “tornado {April 11, 2011 in Tushka, OK}” )

• Pests (insect damage, disease damage, weeds, wildlife)

• Input quality (genetics), input availability, machinery efficiency

• Fire, theft, & other casualties

Tools & Strategies to Deal With - Production Risks

• Enterprise Diversification–Different types of Crops–Grow Different Varieties–Different locations–Rotate crop land

–(Will they fit your operation and be profitable?)

Tools & Strategies to Deal With - Production Risks(cont)

• Get Off-farm Employment for the owner or Spouse (small Farm) - To diversify income sources – Effectively Spreads the Risk Among Industry Sectors (1st mention)

Tools & Strategies to Deal With - Production Risks(cont)

• Technology to protect against weather events:– Plasticulture– Irrigation (drip, sprinkler)– Frost Protection– Tile Drainage (heavy rainfall)– Hoop HousesCrop Insurance (When used with a sound

marketing program, can stabilize income)** May be extremely expensive for specialty

crops

Benefits of Plasticulture

• Solarization of Soils– Kills insects, diseases, fungi, nematodes

• Heats the seed bed (earlier production)– Black– Clear

• Cools the seed bed (later production)– White– Reflective

Irrigation

Benefits of IrrigationIrrigation helps to increase agricultural production.

It helps to utilize land for agriculture.

Diversified crops like corn, beans, peas and so on can be harvested.

High valued cash crops are grown as annual crops with the help of irrigation.

Benefits of Irrigation (cont)

• The yields from the irrigated fields are stable and reliable. Assured production targets can be met.

• Reduces fluctuations in the year-to-year yields and the risk of crop failure due to drought.

• Allows for continuous cultivation.

Irrigation - Sprinklers

Irrigation – Spray Jets

New Technology Certa Lok Irrigation System

Plasticulture & Drip Irrigation

Drip Irrigation

• Producers also find they can get equipment in the field when they need it rather than waiting for the soils to dry. “The ground is almost always dry enough to get a sprayer or other large equipment in the field even though you're providing moisture to the plant roots.”

Pest Control

• Scouting• Identification of Pest• Determining What will Control the Pest• Determining How To apply the Pesticide

1947

Modern Spray Plane

Precision AgricultureUnmanned Aerial Vehicles

(UAV)

• There are two main platforms available: fixed wing and multi-rotor. A fixed wing platform has the advantage of covering large areas efficiently, whereas a multirotor shines in being able to remain very stable in challenging conditions with large payloads.

Unmanned Aerial Vehicles

Requirements for Precision Tools • GPS – May 1st, 2000• President Clinton signed executive order boosting

civilian’s access to the Global Positioning System providing more precision in navigation.

• Global Positioning Systems (GPS) are the backbone of most spatial technologies. GPS on the UAV tells the autopilot where it is at all times. In addition, GPS links the data collected to it’s spatial position (aka geo-referencing).

Accuracy

• The Piksi offers centimeter level accuracy inside a compact design ideal for small UAVs. The improved accuracy will be invaluable for autonomous landings and improved accuracy of geo-referencing data.

Autopilot

• UAV autopilots have improved very quickly with increased reliability, especially within the open source community.

• Autopilots are essential for being able to effortlessly fly over a whole area to collect the desired data.

Autopilot

• Usually the UAV is communicating with a ground control station (GCS) via radio link.

• GCS is usually just a laptop computer with software such as Mission Planner. Mission Planner is also used to set the flight paths for the UAV missions.

Sensors (cont)

• Researchers are working hard improving sensors for UAVs.

• Projects of interest include high accuracy geo-referencing of imagery ‘on the fly’ and the use of a hyperspectral push broom scanner to collect data.

Benefis of a Hoop House

• Extend harvest in the fall• Enjoy greens through the winter• Get an early start in the spring• Be the first to harvest and sell in the spring• Keep rain from splashing soil on plants

Grow-it 6ftX8ft - $239.99 + s/h

Source; IGC Greenhouse Mega Store

Hoop House

20ftX12ftX24ft - $2,989 +s/h26ftX12ftX96ft - $6,245 + s/h

Source: Memphis Net & Twine Co., Inc.

Hoop House

26ftX96ft - $6,499 + s/h30ftX96ft - $7,039 + s/h

Source: Clear Span

Hoop House

The US Government may provide funding for a high tunnel pending the approval of your local

Natural Resource Conservation Service (NRCS) office

Source: Clear Span

Multiple crops under one roof

Multiple Crops and different planting regimens for season extension

Tools & Strategies to Deal With - Production Risks(cont)

• Site Selection– Consider rented acreage away from home farm

which is less susceptible to identical weather related events• Rain• Hail• Freezes

For new plantings – Buy or Rent superior land sites relatively close to home farm

Insurance

20142014

USDA’s New “Whole-Farm” Insurance Program for Fruit & Vegetable Growers

“Whole-Farm” Insurance Program for Fruit & Vegetable Growers (cont)

• Under the program, farmers can insure all crops on their farm at once, rather than insuring commodity by commodity. Many fruit and vegetable crops have not had crop insurance programs designed for them. This allows farmers greater flexibility to make planting decisions on their land.

• Starting with 2015 Crop Year *

“Whole-Farm” Insurance Program for Fruit & Vegetable Growers (cont)

• The policy offers coverage levels from 50 to 85 percent; recognizes farm diversification through qualification for the highest coverage levels along with premium rate discounts for multiple crop diversifications.

• Starting with 2015 Crop Year *

“Whole-Farm” Insurance Program for Fruit & Vegetable Growers (cont)

• The Market Readiness Feature, as outlined in the farm bill, simplifies insurance coverage for producers under the program by allowing the costs such as washing, trimming, and packaging to be left in the insured revenue instead of having to adjust those amounts out of the insured amount.

• Starting with 2015 Crop Year *

“Whole-Farm” Insurance Program for Fruit & Vegetable Growers

(& Livestock)• The new policy is designed to meet the risk

management needs of diversified crop or livestock producers including those growing specialty crops and/or selling to local and regional markets, farm identity preserved markets, or direct markets.

• Starting with 2015 Crop Year *

The Whole-Farm Revenue Protection program

• Is designed to fit any farm with up to $8.5 million in insured revenue, including farms with specialty or organic commodities (both crops and livestock). The policy allows these growers to insure a variety of crops at once instead of one commodity at a time. That gives them the option of embracing more crop diversity and helps support the production of a wider variety of foods.

Whole-farm revenue protection

• Sales closing date for the Whole-Farm Revenue Protection program is March 15, 2015 for the 2015 crop year. Interested producers and current policyholders are encouraged to visit with a crop insurance agent to learn how whole-farm revenue protection may fit within their farm’s risk management needs. Growers must make all of their decisions on crop insurance coverage on or before the sales closing date.

Whole-Farm” Insurance Program for Fruit & Vegetable Growers (cont)

• Immediate Need:– Critical to establish identity of farm with FCS– Some established USDA programs need to be

terminated by January 31

Whole-farm revenue protection

• Federal crop insurance policies are sold and delivered solely through private crop insurance companies and agents.

• A list of crop insurance agents is available at all USDA service centers or on the RMA website at: www.rma.usda.gov/tools/agents.

Whole-farm revenue protection

• More information, including availability of the product, can be found on the RMA website at: http://www.rma.usda.gov/policies/wfrp.html.

Marketing RisksMajor Sources

Price Risk – due to:– Increases in supply– or Changed Demand

• Market availability:– Loss of Market Access due to:

• Plant Relocation or closing• or Buyer Turnover

• Weak Marketing Power due to small size of seller relative to buyers

Tools & Strategies to Deal With - Marketing Risks (cont)

• Form or Join a Marketing Cooperative–May enhance selling prices–May reduce purchased input prices–Guarantees a Market–Evens out cash flow through deferred

payments• There is a cost for deferred payments

in the form of interest. But most risk management strategies have costs of some sort.

Tools & Strategies to Deal With - Marketing Risks (cont)

• Direct Marketing of products• Receipts are likely to vary less than if

selling to processors or fresh market wholesalers

• May be a better way to differentiate your product in the marketplace, but requires “retailing” skills

Tools & Strategies to Deal With - Marketing Risks (cont)

• Contract Production – Can reduce downside price risks (Also eliminates taking advantage of a rise in prices)

• Inputs specified?• Conditions and Legal Issues?• Reduced Flexibility?• Transactions Costs?

Financial RiskMajor Sources

• Production Risks• Price Risks• Inflation – Especially cost

increases of key inputs• Increases in Interest Rates

Tools & Strategies to Deal With - Financial Risks(cont)

•Maintain liquidity - current ratio, or current assets/current liabilities at 2.0 or above

•Maintain credit reserves

•Invest in making the business more efficient or lowering cost/unit

Tools & Strategies to Deal With - Financial Risks(cont)

Family expenditures –

There is an interaction between family expenses and business obligations in most farm businesses. Deferment of some household expenditures when income is low is obvious, but not always attainable.

Tools & Strategies to Deal With - Financial Risks(cont)

• Off-farm employment for a spouse or other family member-preferably in a business that is not directly related to agriculture. (2nd mention)

• Benefits such as health insurance, group life insurance, and a retirement program are helpful!

Legal & Environmental RisksMajor Sources

• Tort liability (especially a concern for direct marketers)

• Business structure

• Environmental liability

Tools & Strategies to Deal With Legal & Environmental Risks

• Carry sufficient farm or business liability insurance.

• The best advice is to be forthcoming with insurance agents about all direct marketing activities so that you can be assured of adequate coverage

Tools & Strategies to Deal With Legal & Environmental Risks (cont)

• Use “good agricultural practices”

• Good neighbor relations

Human Resource Management RisksMajor Sources

• Loss of an essential owner, manager, employee

• The three D’s (Divorce, Death, Disability)

• Injury

Tools & Strategies to Deal With Human Resource Management Risks

• Good Human Resource management practices (for family as well as outside employees)

• Sufficient life insurance for key owners to insure business continuity

Tools & Strategies to Deal With Human Resource Management Risks (cont)

• Improve safety performance

• Reduce legal risk arising from employee relationships.

• Control liability of employees

LED Lighting

• For greenhouse crops such as high-wire tomato, which have self-shading problems while the sun tracks across the greenhouse and on low-sunlight days, LED arrays can be located within the dark leaf canopy itself without overheating the plants while lighting the leaves and fruit clusters for efficient tomato production.

Food safety

• Microbial control of postharvest diseases has been extensively studied and appears to be a viable technology.

• Food safety must be ensured at each postharvest processing step, including handling, washing of raw materials, cleaning of utensils and pipelines, and packaging.

TAKE ADVANTAGE OF EDUCATIONAL

OPPORTUNITIES

Improve Your Knowledge

Trinidad Moruga Scorpion – the hottest!>2,000,000 Scoville Heat Units

Jalapeno = 1000 - 4000 Scoville Heat Units

Points to Remember(cont)

• NOW is the Time to begin Planning the risk management for your agricultural business.

• **(Especially if you are not currently in the USDA – FSA System)**

• Don’t wait until the business puts you in a difficult situation.

From 101 Rules of Risk Management by Tom Hallet

• Everyone is in business to make a fair profit

• Long-term, good faith relationships are not obsolete

• Integrity is not out of style

• Common sense is still the single most important ingredient in risk management

Questions?• Merritt J. Taylor

• Oklahoma State University• Department of Agricultural Economics

• Cell: (580)-513-5555• merritt.j.taylor@okstate.edu

• James W. Shrefler• Oklahoma State University

• SE Area Extension Horticulturalist• Jim.shrefler@okstatae.edu