Risk management increases in importance as incidence of risk increases
Worland – “In this day and age, risk has been increasing and income levels have been increasing as we have higher commodity prices for operators,” said John Hewlett, UW Extension farm and ranch management specialist. “We have additional challenges in terms of managing risk in the face of those factors.”
Hewlett detailed risk management strategies and options that farmers and ranchers can take advantage of to be successful in the face of the challenges present in today’s production climate during the 2014 WESTI Ag Days, held in Worland at the beginning of February.
“If we are going to be successful, we need to approach production differently and make adjustments,” Hewlett noted. “One thing we can do is to utilize a strategic approach to management.”
A strategic approach, he explained, involves looking toward the future and making attempts to accommodate potential changes to best position the operation for success.
“There is a lot more volatility in terms of risk, and if we think about them in a strategic framework, we will be in as good a position as we could hope for,” he said.
Strategic management involves three stages – strategic, tactical and operational.
Hewlett noted that each stage is broken into additional steps.
“At the strategic level, we think about the big picture and try to consider where we are, knowing what we have to work with in terms of the farm’s financial resources,” he commented.
The second step involves looking at the operation’s willingness to accept risk. Every operation and producer has different risk preferences, and Hewlett noted it is up to the producer to determine how risk averse they are.
“Not everyone sees risk in the same way,” Hewlett said. “We have to establish our risk goals and objectives to move toward a better position for our business for the future.”
The strategic level, he commented, involves looking at the big picture, whereas the tactical level to risk management intends to help producers determine how they will accomplish those goals.
“Tactical answers the question, how do we get there?” Hewlett said. “We look at different alternatives, how they compare to what we know about the risks we have and try to prioritize the most important risks and greatest threats.”
By identifying different management options and approaches, Hewlett noted that producers can identify those steps to encourage the best production available.
After deciding the strategy level that will be maintained in an operation, producers move on to the operation phase.
“At the operation level, we begin implementing and operationalizing these plans,” Hewlett noted. “We assign who is responsible, when things need to be completed and determine a timeline to implement changes.”
Implementation, he said, involves monitoring and adjustments, as well.
“No matter how good of a plan we put together, the real world causes us to need to shift and adjust,” Hewlett commented. “No matter how good of a plan we put together, we have to be resilient as the forces and factors work together in the environment.”
By reconsidering and implementing these plans, Hewlett noted that operations can continue to improve.
“A lot of times, we feel like the future is happening to us, but if we become more active, we may be able to position ourselves better when the future arrives,” Hewlett said.