sure the proper beneficiaries are desig- 

 nated, and tiie proper eventualities are 

 insured against, be it fire, flood, wind, 

 insurable disease, etc. An appropriate 

 amount ot liability insurance is neces- 

 sary to avoid financial loss from law- 

 suits. Pollution insurance is also very 

 important tor farms, and the limits ot 

 liability coverage tor pollution issues 

 should be understood. For small tarm 

 businesses, lite insurance and disability 

 insurance are critical since the death 

 or disability ot the operator could 

 spell the end ot the business. For all 

 insurance, having honest and knowl- 

 edgeable insurance agents is critical. 



Production: Besides crop insurance, 

 production-hedging strategies include 

 longer term planning such as crop 

 and varietal diversification, geographic 

 field separation, etc., to lessen the 

 chance ot catastrophic losses trom one 

 event. 



Marketing: Most businesses need a 

 certain minimum price, above variable 

 costs, to meet their financial obliga- 

 tions given their productive capacity. 

 These tacts can influence market strat- 

 egy and choices, niche positioning ot 

 product lines, and consideration 

 ot competitive advantages. Shitting 

 market preferences and the com- 

 moditization ot many plant products 

 presents a significant risk element to 

 be managed within the green indus- 

 tries. Many agricultural commodities 

 can minimize their price risk by hedg- 

 ing in the futures market. Although 

 greenhouse & nursery growers can 

 not hedge, see the sidebar tor one 

 example of how a grower can manage 

 an element ot his or her marketing 

 risk. 



Cost of Inputs: As tar as changes in 

 operating costs go, consider identitv- 

 ing and locking in major costs lor 

 your operation to avoid being hurt by 

 dramatic changes in price. It the cost 

 ol debt capital is high lor your busi- 

 ness, consider fixing ,ill or a portion 

 ot your interest rates on your lo.ins. 

 Consider pre-purchasing of lucl and 

 fertilizer when prices are favorable. 

 Opposite decisions on locking-in costs 



can be equally valid tor different op- 

 erations, but the owner choosing to 

 take the market risk (often to take 

 advantage ot perceived potential lower 

 total costs) needs to recognize the po- 

 tential impact on their bottom line 

 and have the capacity to absorb that 

 risk. 



Legal Risks: The very way you struc- 

 ture your business, and the operating 

 entity you choose (sole proprietorship, 

 corporation, partnership or LLC) is 

 important to minimizing your risk 

 trom lawsuits. How assets are owned 

 is often more important than what 

 type ot entity is used. Proper account- 

 ing and meeting government "mainte- 

 nance" requirements are also key to 

 preserving any protection a legal en- 

 tity may provide. 



Human Resource Risks: Having job 

 descriptions, and employee handbooks 

 can limit exposure to suits by employ- 

 ees. Another key area is succession 

 planning. It a key member ot the 

 business dies or leaves, can the busi- 

 ness survive? 



Final Words: The preceding list of 

 risk areas is not meant to be an all- 

 inclusive list ot the risks that a tarm 

 business can face. Rather, the previous 

 ideas are presented to get you think- 

 ing about how all-encompassing risk 

 planning can be, and encourage vou 

 to develop your own integrated risk 

 management plan. A good risk man- 

 agement plan is a key component ot 

 and should be integrated with the 

 goals and strategic plans of the busi- 

 ness. It should also be periodical Iv re- 

 viewed and updated. 



First Pioneer Farm Credit provides risk 

 nianagement consulting services to agri- 

 cultural businesses. In doing so, our ob- 

 jective is to look at the total business to 

 assist the owners in moving successfully 

 through all three of the planning steps, 

 and to help owners evaluate the impli- 

 cations of the decisions they choose. 

 Contact First Pioneer for more informa- 

 tion. Fhe Bedford Nil office can be 

 reached at S()()-825-.U52. " 



Risk Planning Example: 



Concentration of Sale and 



Credit Risk 



Some farmers sell Iheir crop and sell il 

 on credit terms to a small number of 

 marketing oullels. These farms are said to 

 have a high concenlralion of sales, and if 

 the crops are sold on terms, credit risk. 

 This is especially true for wholesale green- 

 houses targeting mass-market retailers. 



Many farmers do not realize how large a 

 risk this really is. Consider this example. As- 

 sume you own a $2 million gross sales 

 greenhouse, selling S0% of your finished 

 material to two mass market retailers. If 

 your payment terms are 60 days (sound fa- 

 miliar?), you have effectively shipped all of 

 your material to the buyer before the 1st in- 

 voice is due. At that point you are financing 

 their purchase of your crop. That's over a 

 uiillion dollars of unsecured credit you are 

 granting to two buyers. What happens if the 

 handler's business fails after your crop is 

 sold and gone and before they pay you for 

 it? What would be the impact to you if your 

 largest customer could not pay for delivered 

 product? How far do you need to look to 

 find a grower who has had far too personal 

 an experience with this isstie? 



If this scares you. it should, r.xperts ad- 

 vise that when selling crops on terms, you 

 need to think like a banker. Ask yourself, 

 would you lend your buyer SSOO.OOO with 

 no collateral? A good risk management plan 

 would include annual review of the financial 

 ability of a buyer to pay you for your crop. 

 Get your buyer's financial statements, and 

 evaluate their financial ability to pay you for 

 your crop. For publicly held buyers, the 

 financials are readily available. In the case 

 of a closely held corporation being your 

 marketing outlet, consider recjuiring the per- 

 sonal guarantee of the company's owners 

 for payment of yoin- crop. For those selling 

 food crops, knowledge of special protections 

 offered farmers by the Perishable Agricul- 

 tural Commodities Act of l')30 (PACA) 

 against lo.ss from non-payment of crop pro- 

 ceeds is important. These protections should 

 be specifically referenced in your terms of 

 sale. A food crop farmer should seek legal 

 advice about PACA provisions in their mar- 

 keting arrangements, since their marketing 

 contract must contain S|)ecial terms and lan- 

 guage to afford the producer its protections. 



the I'hiiilsiiuiii 



