Managing farm risk requires you to take a look at the factors that affect your farm but are out of your direct control. Farm profitability is directly related to how well your farm can manage these risks. The Best Management Practice for farm risk management is to assess risk annually and develop an overall risk-management plan.
When thinking about risk, you need to think about what this risk cost you. For example, a 5% reduction in yield could result in a 50% reduction in net income. A study by Queen’s University (2008) found that a sick day costs a farmer $700 on average (seasonal dependent). Estimating the value of yourself to your farming operation is tough but necessary when thinking of what it would cost to replace yourself. What about if you have to fill in for a worker? The time taken to do the tasks of someone else could result in the lost opportunity of making important business decisions.
The first step in managing farm risk is to identify it. Where is your farm low-risk and where could you be making changes to lower your risk? There are six general areas to think about when assessing risk for a farm: production, personal (safety, succession, illness), environment (water, soil, air), price & financial, legal (contracts, regulations) and public (consumer issues).
Once you know which areas of your farm could be improved, you can then start developing strategies for managing these risks. For example, can you provide better training for your farm employees? Can you diversify your farm to help decrease the risk of weather impacts (i.e. crop rotations, disease control, a mix of livestock and crops)? Can you do a combination of grain contracts to minimize the effect of market price volatility to your operation? Do you need to complete an Environmental Farm Plan or update your existing one to better manage your environmental impact?
Think about what areas of your farm are at higher risk and how you can improve these areas. Assessing your level of risk through a whole-farm approach can help you be more successful and profitable in the long-run.
Click here to download a worksheet to guide you through identifying risk on your farm.
Click here to download a worksheet to help you develop risk management strategies for your farm.
Based on information presented by Rob Hannam at "FCC Farm Business Plans: Risk, Reward & Profit" in Temiskaming.