Parsons encourages producers to take proactive approach to controlling riskWritten by Gayle Smith
Jay Parsons firmly believes that risk can be controlled.
“Inevitably, bad things do happen, like bad weather,” Parsons told livestock producers during the Nebraska Grazing Conference. “But producers should think of risk and take a proactive approach to controlling it.”
“Risk is a personal decision,” Parsons, who is an agriculture economist at the University of Nebraska, continued. “It is the producer’s choice, and they have to be comfortable with it based on the information they have to work with. Risk can be more than just negative. If they are proactive about risk, producers can make good things happen. Risk is the effect of uncertainty of objectives.”
Developing a plan to control risk can help producers identify their objectives and what they want to accomplish. It can also help identify the things that could threaten those objectives, as well as achieve them.
Parsons recommends identifying what an operation's objectives are, whether it is planting a crop a producer has never planted before to earn some additional income or adding sheep as an additional enterprise to the operation.
“Risk management is about creating value as well as protecting it,” Parsons said. “Create value for your operation. It will increase the probability that you can accomplish your objectives,” he said.
It is no secret to producers that just becoming involved in agriculture is risky.
“Risk management should be viewed as a priority and used as a way to get the competitive advantage,” he said.
The five sources of risk are marketing or price risk, production risk, institutional – also defined as legal or social risk, human risk and financial risk.
“Business risk is a risk that is there, no matter how a producer is financed,” he explained.
Financial risk is the extra risk that comes with being leveraged. Parsons said an example of this would be a producer building up his resources only to have a grazing lease pulled out from under him.
“It could have devastating effects on an operation,” he explained. “That is why setting up good land leasing practices is a financial must. Most leases are by handshake, but it is always better to get it in writing and have a good relationship with the person one is leasing from,” he said.
Parsons also sees human risk as a major component of a successful operation.
“Humans are a risk because of the decisions they make and the things they do,” he explained. “Losing employees can leave a producer with a big void to fill, and what about health issues and injuries? If someone is injured, is there a backup plan in place to fill that void? Many operations don’t have one.”
Employees are vested in the operations they work, and they are important. Parsons shared a story about a producer who was named Employer of the Year. During his recognition speech, the man wouldn’t take credit for anything but was quick to give credit to his employees for the success of the operation.
During questioning, the man revealed that he never made a decision without first consulting with his employees. If he was buying a piece of equipment, he would take the employee who would be running it along. If he was buying more land, he included the employee who would be doing the farming.
His success was attributed to including his employees in the decision-making process. Therefore, employee moral was high, and it contributed to his success and the success of the operation.
Parsons discussed with producers the importance of properly training employees for the jobs they are asked to do.
“It is important to keep their moral up, prevent them from being injured and keep them from becoming frustrated and leaving the operation,” he said.
Parsons said producers can manage institutional risk by staying involved and providing input into important issues. They can also control market risk by staying up to date on the markets and developing a fallback plan. Production risks can be controlled by implementing good prevention plans, such as vaccinating cattle for disease and developing strategies to attack a problem head-on.
“Producers who are good at managing risk are always asking themselves if there is a way to reduce the probability of something happening,” Parsons said. “We can’t control the probability of something like drought from happening, but there are things we can do to reduce the impact.”
Producers should also be open to diversification.
“It is the number one tool of risk management,” Parsons stated.
Producers can access many marketing tools to help control risk.
Livestock Risk Management Insurance is available for feeder cattle and fed cattle. It covers producers for changes in price, but it doesn’t cover sickness and death. This insurance can also help protect producers who have purchased expensive breeding animals the last few years and are concerned with price drops from a volatile cattle market.
The product is available for 13 weeks up to 52 weeks. Producers just need to plan when they plan to market their cattle and at what weight.
“It is basically a put option without the hassle of dealing with a broker,” Parsons said. “Producers don’t have the decision of actually exercising the option.”
This program is subsidized by the government, so producers only pay 87 percent of the premium.
“It is not a money-making tool, but it is a price protection tool,” Parsons said.
The first documented crop insurance program was in 1473 in Italy. Now, 542 years later, there are still new and improved crop production products coming out to help producers control production risk.
Some of these new products are even designed for grazing management. Precipitation insurance based on rainfall in designated areas came out a few years ago. This insurance relies on data collected by National Oceanic and Atmospheric Association (NOAA) to determine if payments will be made. Producers can look at 60-plus years of data collected by NOAA for their area to determine if they want to participate in this program, which is also subsidized by the government.
Annual forage insurance just came out last year and is available to producers who plant annual forages intended for livestock consumption. Producers have to declare what they are planting and what they intend to use it for when purchasing the product.
In July, the Conservation Reserve Program (CRP) grasslands initiative was authorized. Under this program, producers can apply for annual rental payments and still graze the land. The goal of this program is to encourage producers to implement some conservation practices.