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PIONEER POINTERS 



Risk Management Planning 



Risk Management, is a popular 

 buzz phrase in business these 

 days. In fact, many large companies 

 have entire departments devoted to 

 risk management planning. Risk man- 

 agement planning though, should not 

 exist solely in the realm of large com- 

 panies. Every company, regardless ot 

 size should have its own integrated 

 risk management plan. This is espe- 

 cially true tor agriculture, which tends 

 to be one of the more high-risk busi- 

 ness ventures. 



Integrated Risk Management Plan- 

 ning: Risk Management is the process 

 by which the management ot a busi- 

 ness identifies potential uncertain ex- 

 posures that can have a negative im- 

 pact on the business and develops 

 strategies to manage these exposures. 

 Many hirm businesses deal with risk 

 in an incomplete and passing manner. 

 They buy some insurance, and hope 

 for the best. While insurance and op- 

 timism are verv important tools tor 

 dealing with risk, real risk manage- 

 ment planning goes much farther. 

 Risk management is really business 

 planning, and any risk management 

 plan should be integrated with the 

 overall strategic and tactical plans ol 

 the business. 



Risk management plans must be 

 customized tor each business. These 

 plans should consider such things as 

 risk tolerance, goals of the owners, 

 planning horizon, Hnancial ability ot 

 the business to absorb adverse events, 

 etc. On a regular basis, the plan 

 should be reviewed and adjusted peri- 

 odically. 



Integrated risk management plan- 

 ning involves three steps: 



1. Identitying areas ot risk exposure 

 and taking steps to lessen the 

 chances that unfavorable events may 

 occur. 



2. Developing contingency plans 

 ahead ot time to reduce the nega- 

 tive impact ot unfavorable events. 



3. Periodically reviewing and revising 

 the plan to adjust to an ever chang- 

 ing business environment. 



Seek Professional Help: A key to de- 

 veloping a useful risk management 

 plan is assembling a team ot experts 

 to address specific areas ot planning. 

 This team may include consultants, 

 insurance agents, attorneys, accoun- 

 tants, crop insurance agents, etc. Also 

 consider hiring a consultant to func- 

 tion as the general contractor to help 

 identity risk areas, develop mitigation 

 and avoidance strategies, and bring in 

 appropriate experts to address specific 

 parts ot the plan. 



Examples ot Risks in Agriculture: 

 Many experts divide risk areas in agri- 

 culture into five primary risk areas. 

 These include: 



• Production: The variability ot 

 yields from factors such as weather, 

 pest pressures, etc. 



• Marketing: Risks associated with 

 marketing your product include 

 risks ot price fluctuations, loss ot 

 markets, and the financial failure of 

 businesses you sell your product to. 



• Financial: May include such things 

 as risk ot loss ot assets from a casu- 

 alty, dramatic increases in operating 

 costs, interest rates, or lack ot avail- 

 able capital. Adequacy of liquidity 

 and capital are areas ot focus when 

 dealing with financial risks. 



• Legal: These risks can range from 

 being sued tor just about anything, 

 fined and/or imprisoned tor crimi- 

 nal violations. 



• Human Resource: IIR risk can 

 arise from disputes with and claims 

 of employees and the resulting law- 

 suits, and the death, disability or 

 departure ot the owner/operator or 

 key employee. 



Risk Management Planning 

 Considerations 



Risk tolerance and Financial Position- 

 ing: The foundation tor risk manage- 

 ment planning is determining your 

 risk tolerance. How much risk you 

 choose to hold or avoid is an impor- 

 tant assumption to base your plan on. 

 The financial position of your busi- 

 ness is also a key consideration in 

 your risk management planning. Do 

 you have enough equity, or liquidity 

 to survive negative changes to your 

 business? Good risk management 

 planning will consider how risky the 

 industry is that you are operating in, 

 and will tailor financial plans to 

 maintain adequate capital and liquid- 

 ity. How much risk you choose to 

 hold will affect how you should posi- 

 tion your business financially. Risky 

 businesses, where the owner chooses 

 to hold a good portion ot risk should 

 be stronger financially with much 

 more liquidity. Think ot building fi- 

 nancial reserves as self-insurance. 



Insurance: Insurance is a key tool in 

 managing risk, and it basically in- 

 volves paying someone else to hold a 

 portion ot your risk. Crop insurance 

 is important tor farmers, and should 

 be tailored to your commodity. For 

 nursery and greenhouse operations, 

 crop risk may be lower on average 

 than it is tor fruit or field crop grow- 

 ers, but when a greenhouse loss oc- 

 curs it is typically more concentrated, 

 complete and costly. Crop insurance 

 programs also offer ways to insure 

 revenues and not just crop loss. Be 



EARLY WINTER 2003 



