Hewlett looks at risk management, risk assessment options for producersWritten by Natasha Wheeler
Casper – Risk is not only the cost of loss but also the cost of uncertainty, said John Hewlett, a farm and ranch management specialist at the University of Wyoming, during the 2013 Progressive Rancher Forum held on Dec. 1.
Because of the lengths we go to avoid risk, the human dimension of risk management is important to consider. Hewlett explained that we act emotionally to avoid failure, being wrong, being laughed at or made fun of and also to avoid losing the farm.
“Those emotions,” he said, “are what end up clashing with other people who see it differently, and it matters in terms of how we see even what alternatives are open to us.”
Some people are more prone to risky behavior, while others work harder to avoid it, he noted.
“Addressing risk and how we choose to manage it depends a lot on how we see what the threats are,” said Hewlett. “In many ways, there is not a right or wrong answer as far as managing risk.”
Examples of risk in agriculture include variables in markets and pricing, production, institutional or legal constraints, work force and management, as well as financial considerations.
“The first two are really familiar. Market and production risks are things that we tend to not like very much, but it’s part of agriculture,” said Hewlett. “Human risk is the category we use to refer to not only labor and working with other people that may be necessary to accomplishing the business but also humans in the sense of transfer, perhaps to the next generation in a family operation.”
Hewlett noted that it is important to determine how much risk is right for each producer. He then suggested seeking alternatives and determining the appropriate course of action.
Producers must evaluate where they feel comfortable in their operations.
“We typically think about the negative effects of a decision, but it’s also important to recognize that there could be positive things that come out of a situation we’re worried about,” said Hewlett.
Income, resources and productive capacity are all included in the cost of loss. Worry, doubt, fear and misallocation of resources apply to the cost of uncertainty.
By defining goals and evaluating assets, producers can determine which precautions they prefer to take.
Evaluating the trade-offs in a risk scenario is important.
A greater risk can lead to greater wealth over time but can also cause a catastrophic loss.
To evaluate the best course of action, goals must be defined so that a producer can know what “better” means.
“It’s a balance of carrying enough return, or risk that will bring return that the producer thinks is worthwhile, while realizing that they’ve got to have some risk to make that possible,” said Hewlett.
Risk can be avoided, reduced, transferred outside of the business, taken on with an increased capacity to handle it or accepted as part of the operation.
Hewlett explained, “If there is no risk, the level of return in going to be low.”
The new Farm Bill has some important changes and updates, said Hewlett, and includes various production insurance plans that can be considered to reduce risk by paying a premium up front.
He also suggested visiting the Right Risk at rightrisk.org for assistance in assessing risks. The site allows for producers to input their own information and get probability curves for various scenarios.
The information can help a producer determine the value of insurance programs, such as Livestock Forage Disaster Program (LFP), Livestock Indemnity Program (LIP), Emergency Assistance for Livestock Program, Honeybees and Farm-Raised Fish Program (ELAP) or other federally funded programs.
“If producers want to read about how others have used LRP and PRF, as well as how they work in example situations, we have some of those online,” said Hewlett.