Federation of Southern Cooperatives
Land Assistance Fund

 

The following summaries of how to address production, marketing, legal, human resources and financial risks weretaken from the USDA's Risk Management Agency's December 1997 publication entitled  “Introduction to Risk Management”.

PRODUCTION RISKS

Sound planning determines a favorable outcome or yield for the farmer. The major sources of production risks that you as the farmer should be aware of are weather, pests, diseases, technology problems, genetics, efficiency of machines, and the quality of inputs such as seed, fertilizer and pesticides. Good strategies can avoid these risks.

1.   Enterprise Diversification - combining different enterprises to lower production risks and stabilize cash  flow that results from agricultural production.
Examples of effective diversification:
• Different types of crops
• Raising crop and livestock together
Note: This is a costly strategy because of the greater demand for capital investment; and requires serious commitment and dedication to all enterprises.
Long Term effects - reduces production costs, debts, and family expenses.

2.  Crop Insurance - protects you against loss and offers the opportunity for consistent and stable agricultural gains.
Benefits
• Ensures a reliable level of your cash flow.
• Allows more flexibility in your marketing plans.
• Partially replaces federal government assistance no longer available.
Types
• Multiple Peril Crop Insurance (MPCI)- natural  disaster coverage.
Note: Catastrophic Risk Protection (CAT) is the lowest level of MPCI and fully subsidized by the federal 
government.
• Crop Revenue Coverage (CRC) - protection for yield and price losses.
• Group Risk Protection (GRP) - natural disaster coverage for county yield.
• Other Programs - Income Protection (IP); Revenue Assurance (RV).
Availability
• Offered only through private crop insurance agencies.

3.  Contract Protection - agribusiness firm controls the processing of the product.
• Advantages- product is always marketable, price is guaranteed.
• Disadvantages- less flexibility for the farmer, price is fixed.

4.  Evaluating New Technologies - looking for economical strategies. 
Examples of the two newest crop technologies:
• Genetically altered seeds - seeks to improve weed control and resistance to disease or insects.
• Precision Farming - controls the application of crop inputs on farm acres 
Benefits - Improved pest control leads to higher crop returns for you and  more cost effective use of your crop inputs.

MARKETING RISKS

Today’s global market requires you to have a developed and balanced marketing plan that considers different factors and marketing risks. You should focus on long-term profits and not be discouraged by short-term failures. You should consider the following strategies as a guide to success.

1.  Personal Considerations in Marketing - a personal plan based on your needs.
•  Know the level of risk that matches your current financial situation.
•  Be willing to increase and strengthen your marketing skills.
•  Develop a marketing approach that considers all aspects of your business.

2.  Developing a Marketing Plan - a plan based on your goals and objectives
• Have an accurate understanding of the production costs.
• Analyze the supply and demand for your product.
• Be aware of the area prices for your product, as well as the average price.
• Always include financial and personal circumstances into your plan.

3.  Marketing Plan Discipline - requires self-discipline to stay focused.
• Never let your emotions rule your marketing decisions.
• Stay on track, do not stray from your marketing plan.
• Always have a backup plan when things do not go as you expected.

4.  Marketing Tools - the right tools reduce risk and increase profit.
Examples of some tools that are used:
• Marketing Cooperatives - membership in co-ops provides members the benefits from volume sales or  purchases.
• Basis Contract - allows you to fix the basis price, but allows the final cash selling price to be established later, based on the future price for the crop. “Basis” is the difference between the local cash price and a futures contract price.
• Contracted Production - purchasers offer production contracts to farmers for specific agricultural products. Assures a reliable cash flow.
• Cash Sale - occurs during favorable price sales, and the market is doing well.
• Minimum Price Contract - a minimum price for the product is set between the farmer and the producer. Eliminates downside price risk.
• Direct Sales - the producer sells directly to consumers in a market area to increase profits and reduce  risks.

LEGAL ISSUES

Understanding legal issues in agriculture will lead to better risk management for you. There are four important areas involved:
•  Legal structure of your business and proper tax and estate planning 
•  Contract arrangements
•  Tort liability
•  Statutes and laws, including environmental issues

1.  Structure of the Business
• You may operate your business in different forms such as partnerships, limited partnerships, limited liability companies, corporations and many trust arrangements. Be very attentive, sole proprietorships are not the only forms.
• You need to select a structure that will decrease your income and property taxes as well as reduce your liability to third parties.
• Estate planning, from making a will to setting up family corporations, is very important and must be considered when you decide what business entity you will use. It will reduce future problems with your estate.

2.  Contract Arrangements - agreement between two parties, exchange of promises. 
Types of Contracts
• Financial arrangements such as promissory notes, mortgages, leases
• State and Federal farm programs
• Sale of agricultural products between the farmer and buyer
• Crop Insurance, employment arrangements 
Enforcing Contracts
• Always ensure that your agreement is in writing so that it can be legally enforceby a court.
• Courts generally provide two types of relief for breach of contract: specific performance or damages.
• Nonperformance of contracts results in harsh legal ramifications such as foreclosure or even bankruptcy.

3.  Tort Liability
• Person is injured negligently or intentionally on a farm or ranch property.
• Liability may also result from damage to air and water quality because of agricultural activity.
• Always maintain the proper insurance coverage for tort liability.

4.   Statutes and Laws
• You must obey all statutes and laws that apply to farmers and ranchers. Failure to do so results in fines, penalties and abatement.
• You should understand pollution laws and always keep records for environmental audits to avoid criminal  liability.
 
 



HUMAN RESOURCES ISSUES

It is very important that you consider human resource issues to avoid agricultural risks or effectively manage potential risks. This area deals with managing people and managing your own life.

1.  Managing People
• Human resource management is a process that forms seven functions:
   -Job analysis and descriptions
   -Hiring
   -Orientation and training
   -Employer/employee interaction
   -Performance appraisal
   -Compensation
   -Discipline
• Families that work together can develop a good management system which clearly lays out how plans and decisions are made for the business.
• Family and outside employees should work together in  the planning process to create a sense of group    ownership and pride. This will also improve safety performance, reduces legal risks that result from employee relationships, helps everyone focus on the right priorities and gives employees a better opportunity to plan their own lives.
• Human Resource management must also anticipate problems that may occur such as divorce, death, chronic illness, and accidental death so that the business will be prepared to face these problems when they arise.

2.   Managing Your Life: Estate Planning - process of planning to dispose of your life’s work.
• You must plan your estate if you have business or personal assets and family responsibilities.
• You should always make a will, constantly review it and consult a competent attorney to guide you through the legal process.
• You must ensure that the distribution is fair and according to your wishes especially for a life of hard work.
• Estate planning reduces tax liability and preserves more assets for your family.
• It will give peace of mind for you, your family and any  business partners.
• You will be satisfied that your business will continue with very little disruption.

FINANCIAL RISKS

This risk must be managed through good planning and financial control. Financial risk has three basic parts:
•  Cost and availability of debt capital
•  Ability to meet cash flow needs on time
•  Ability to maintain and grow equity that is established

1.  Farm Records and Financial Analysis
• Keep well maintained financial records that will evaluate your past performance, monitor the business and guide you with future decisions.
• Financial records should include balance sheets, statements of your equity, income statements, and projected and actual cash flows.

2.  Interest Rate Risk
• Borrowing capital is an important part of your farming business and interest rates are often out of  your control. Reduce your risk by lowering your debt-to-asset ratio and use of crop insurance as well as a good business plan.
• If you have available capital, use it to finance your business and reduce your interest rate risk.

3.  Liquidity and Meeting Cash Flow Requirements
• Liquid assets can be converted quickly to cash in emergency situations. You need this safety net for production disasters or poor market conditions, yet it should not be excessive because fixed assets generate higher profits.
• Your expenses should be carefully planned in advance so that you know your cash flow needs very well and take advantage of good pricing opportunities.
• Ensure good cash flow by reducing your personal expenses, using resources efficiently, leasing assets and using the right insurance programs.

4.  Insurance
• Always keep your insurance updated.
• Review your insurance each year to make sure that you have proper coverage and protection.

5.  Family Living Costs
• Financial risk can be reduced if you control and monitor your family living costs.

6.  Legal Issues and Security 
• You should always have sound knowledge of the important legal issues involved in borrowing capital. If not, consult a competent attorney.
• Establish lending security through a good marketing plan, accurate financial records and timely repayment of loans.