Introduction to Risk Management
Contents: It's a Whole New Ball Game | Understanding Goals and Risk Tolerance | Understanding Production Risks | Understanding Marketing Risks | Understanding Financial Risks | Legal Issues Associated With Agriculture | Human Resources Issues
It's A Whole New Ball Game
Risk has always been a part of agriculture. But farming in America is a ball game that has changed dramatically over the past few years. Increasingly, farmers and ranchers are learning that it is now a game with new rules, new stakes. and, most of all, new risks.
The nation's most successful farmers are now looking at a deliberate and knowledgeable approach to risk management as a vital part of their game plan. For them, risk management means farming with confidence in a rapidly changing world. It is the ability to deal with risks that come with new, attactive farming opportunities.
This handbook is part of a campaign to improve the risk management skills of American farmers and ranchers. The urgent need for this campaign stems from many changes in producers" business environment. In this environment, opportunities have increased, but so have the risks. Some of the more important changes affecting producers" risks include:
A changing government role. Increasingly, government policy makers are placing greater confidence in the ability of producers to make sound business decisions. They have passed market-oriented farm legislation and crop insurance reforms that allow producers to be more active in managing their profit opportunities and risks.
Outside forces. Many factors are forcing producers to make risky, but potentially profitable, decisions regarding their businesses. These factors include increased global competition, rapid changes in the structure of production agriculture, changes in the marketing of agricultural products in the farm supply sector, new technology, and more volatile weather patterns.
Risk connections. Increasingly, decisions in certain risk areas are affecting the riskiness and profitability of other aspects of farming. For instance, more lenders are now requiring sound business plans before approving credit. Thus, good management of marketing risks can lower borrowing costs and result in long-run financial stability. As farmers become more aware of the many such connections between their risks, the need for effective risk management will increase.
A broad array of established risk management tools are there, ready to be used. At the same time, a growing interest in agricultural risk management is encouraging the development of exciting new tools and services. By learning about and using these tools, U.S. farmers and ranchers can build the confidence they need to deal with both the risks and the exciting opportunities of the future.
How To Use This Handbook
How can you better manage risk? Well, for starters, you can assess your risk management skills by conducting an annual Risk Management Checkup--one that identifies the interactions between one source of risk and another and causes you to take action.
We have identified five primary sources of risk: Production, Marketing, Finance, Legal, and Human Resources.
Since risk management should be driven by your goals, this handbook first reviews goal setting and risk tolerance. Succeeding chapters will then give you insights into the benefits of improved risk management in each specific area. As you review these chapters, look for instances of the connections between the various areas of risk. Also, consider questions to ask yourself or the professionals whose help you may need.
Remember, you are not competing by yourself. You have a whole team of professional players prepared to help you win. Who are your teammates? They are grain elevator operators, commodity brokers, crop insurance agents, loan officers, extension educators, commodity organizations, cooperatives, lawyers, accountants, and the people in local USDA offices.
Your teammates are currently mastering new skills, identifying new opportunities, and learning how to play as a team. Remember, it's a new ball game for them, too. But, each of them has unique strengths, skills, and experiences. The most effective way for you to use them is to make them part of your team. Share your game plan with them. Then, use their strengths to help your plan succeed.
Start now to think about risk management as a key element of the new ball game of agriculture--a game that you can win. Learn the fundamentals, use your teammates, then act on what you learn. Make risk management an important part of your game plan!
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