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Wednesday, February 24, 2010

Risk Management

Let’s be frank, the economy hasn’t exactly been stable the last 18 months. Although it is not possible to plan for instability, having a plan in place helps a business prepare for the coming year – stable or not. Risk has always been a part of agriculture, but farming in America has changed dramatically in the last few years. And with these changes, our farmers are looking at new ways to approach Risk Management. There have been many changes in producers’ business environment. Thanks to these changes, there are increased opportunities, but also increased risk.

Some of these risks are:

Changing governmental role – with policy makers placing greater confidence in the ability of producers to make sound business decisions, market-oriented farm legislation and crop insurance reforms have been passed allowing producers to be more active in managing their profit opportunities and risks.

Outside forces – increased global competition, rapid changes in the structure of production agriculture, changes in the marketing of ag products in the farm supply sector, new technology and volatile weather.

Risk connections – decisions in certain risk areas are affecting the riskiness and profitability of other aspects of farming.

An illustration of these risk connections would be lenders requiring a sound business plan before approving credit. Showing the good management of marketing risks can lower borrowing costs and result in long-term financial stability. As farmers note this connection, and others, the need for effective risk management will grow.

There are five primary sources of risk for a farmer: production, marketing, finance, legal and human resources. Each of these five have major sources of risk (i.e. production/weather) and strategies (i.e. crop insurance) that can be considered to lower risks. I encourage you to learn the basics, employ strategies and never hesitate to ask questions. Your ArborOne Relationship Manager, local extension agent or local USDA office is more than willing to help.

Check back. Over the next few days I will outline the five primary sources of risk and the strategies that can be used to counter these risks.

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