Risk management provides profitability, sustainability for ranching operations

“Risk is the case where uncertainty matters,” says John Hewlett, University of Wyoming Extension specialist. “Risk doesn’t always imply negative or bad outcomes, but they need to be considered.”

Hewlett explains that understanding risk is essential, but he encourages producers to not get caught up in the complexity associated with risk.

“Uncertain future events may result in good, bad or neutral outcomes,” he says. “The probabilities of either occurring may be unknown. Although risk is a part of everyone’s life, few of us are trained to evaluate it.”

“People tend to think that complex problems require complex solutions,” Hewlett says. “With risk, simple rules can not only clarify choices but also make the consequences more obvious.”

Enterprise risk

With any action for treatment or management changes are taken on a farm or ranch, risk is inherently involved, and he encourages producers to evaluate risk on an enterprise basis.

“When we look at enterprise risk, we’re focusing on the implications of the decisions we make day-to-day or season-to-season and how they impact a single enterprise or commodity, rather than the whole farm or ranch,” he explains.

In looking at risk, Hewlett says producers have four options for managing risk, including avoiding, producing, transferring and accepting the risk.

“We need some sort of formal risk management process to evaluate enterprise risks and make our decisions,” Hewlett emphasizes. “We have to think about a broad range of things that could include anything from time of production to quality or level of input, as well as how those choices impact one another.”

Sources of risk

In addition, Hewlett says the source of risk is also important to consider.

“Not all sources of risk influence each enterprise in the same way,” he continues. “It’s important to know how to identify not only the sources but also how they affect each enterprise.”

The level of control producers have over risks also depends on where that risk comes from.

“We might have a lot of control over one source of risk but not all the other sources of risk,” Hewlett adds. “We also want to consider whether the level of control is sufficient to reduce or mitigate the risk.”

Treatment options

Introducing new management options means risk must be assessed.

“Treatment options are not mutually exclusive or appropriate in all circumstances,” Hewlett says. “When we introduce a management strategy, some attempt should be made to monitor that treatment plan to determine how we can reduce our risks as treatment is applied.”

As the effectiveness of an individual option is evaluated, Hewlett says that data must be collected.

“With a set of treatment goals in mind, we have to evaluate effectiveness in terms of qualitative and quantitative measures,” Hewlett comments, suggesting producer measure changes to income, value of risk and the likelihood of each outcome for a particular change. “We should also forecast the results for each strategy we think about implementing.”

Concrete planning

Hewlett says, after selecting a treatment option, a detailed description and plan for management should be completed, including the action steps and evaluation strategies.

“This plan should also include the expected benefit and performance measures we’re looking at,” he comments. “We need to list them in black and white, along with the people responsible to accomplishing the actions that we take.”

A plan should also include timing and resources that will be required to complete the action.

“We have to take notes and evaluate our choices as we move forward, as well,” Hewlett says, “to determine whether we are being successful.”

Hewlett presented during a late-August webinar, presented by RightRisk.

Saige Albert is managing editor of the Wyoming Livestock Roundup. Send comments on this article to saige@wylr.net