Crucial strategies: risk management tools help producers reap rewards, avoid the worstWritten by Saige Albert
“Risk is thinking about change and the possibility or probability of a bad outcome,” he said. “Risk management is about choosing among alternatives and what we do with management practices.”
Agriculture risk, production risk, market risks, human risk and legal risk are factors that ag producers encounter daily, and at the Wyoming Farm Bureau legislative meeting on Feb. 28, Kennedy noted that there are opportunities to manage risk to avoid devastation, while still reaping rewards.
Transfer the risks
“Producers can transfer risk with hedging, futures, options or contracting, for example,” he explained. “The basic idea is to take the valleys out of market fluctuations and set a floor under what you get.”
Because of the market fluctuation, Kennedy mentioned that averages end up being about the same from year to year, but transferring risk protects producers from terrible losses. An important note, however, is that some loss may still be incurred.
“It doesn’t protect from all the loss, and we give up some of the topside,” he said, “but we protect the places where we are most at risk, or where there are huge dips.”
Protection from the worst
Insurance options are available to help producers ensure that a particularly bad year doesn’t break the operation, but Kennedy also cautioned against going too far. Crop, livestock and pasture insurance programs are all available to provide protection against risk.
“If you’ve got a sure thing, there is no profit left and no upside anymore,” he explained. “Beyond 85 to 90 percent insurance coverage, we have covered our risks so well that our return is only what we get back from the policy.”
Eliminating risk by over-insuring erases the possibility for larger profits, he said, and there are other ways to manage risk.
Diversifying an operation can provide multiple sources of income to mitigate devastating losses in a specific industry segment, but cautions are to be had in diversification, as well.
“Don’t put all your eggs in one basket,” said Kennedy, but, at the same time, cautioned, “If you’re getting into something new, take baby steps.”
He continued that jumping in to a new technology or an emerging market may prove to be unsuccessful, noting that often first-generation technology is slightly flawed, or emerging markets may fizzle.
Producers are already aware of their options to diversify, and many take advantage of it, said Kennedy, encouraging that producers should also look into synthetic diversification.
“The price of corn matters when you are in the cattle business, so think about, for example, setting a call on corn,” suggested Kennedy. “If the price of corn goes up, you can recapture some value, and it will show up.”
“Even if you can’t grow corn or diversify in your own operation, having the right to some corn at a price where you make money on your feeder cattle will offset what you lose if the price of corn goes through the roof,” he continued.
In operations that are diversified, Kennedy noted that analyzing different aspects of an operation can identify areas for improvement.
“We tend to do some things because we have to, and others because we enjoy them,” he said. “It’s easy to play favorites.”
However, in paying more attention to one aspect of an operation, other areas will suffer and more risk will be incurred.
Thinking about risk management strategies and goals is important for producers, and Kennedy mentioned, “Think about problems versus predicaments. Problems have a range of solutions, but predicaments have outcomes.”
By solving problems and protecting an operation against predicaments, risk can be effectively managed and profits can be made.