Cover farming risk in multiple ways

Risk management covers much more than protecting your commodity prices

A wind storm that collapses grain storage bins. A fire that destroys a milking barn. The unexpected death of a parent who’s run the family farm for years. A sudden drop in commodity prices.

Any of these events can and do occur across the United States agricultural landscape each year. They’re just some of the risks that come with farming or livestock production. Without planning, without preparation, they can wipe out the year’s profit or even derail your business. At the very least, they can result in unexpected costs, stress and change.

That’s why risk management, in its many forms, is so important to the long-term success of your operation. It’s about much more than hedging crop prices. Thoughtful risk management anticipates multiple threats to all facets of your business. It prepares you for the downside. It positions you to survive.

With the help of Darin VanVactor, a colleague and manager with Pinion Risk Management, I’ve listed key areas to consider as part of a comprehensive risk management plan for your farm or livestock operation.

• Insure for production and property risk. We’re not just talking about protecting your crops or herd against disease, pests or drought. Your farm structures and equipment—even your home—can also face threats from hurricanes, flooding, snowstorms, wildfire and other natural disasters.

Make sure you have a reputable insurance agent and a good indemnity policy that will compensate you for all such events. Evaluate the level of crop and livestock insurance your operation needs and sign up for applicable Farm Service Agency programs such as the Agriculture Risk Coverage and the Price Loss Coverage programs. These safety nets provide financial protections from substantial drops in crop prices or revenues. The deadline to apply for these two programs is March 15.

• Protect your price. Market volatility can be friend or foe when it comes to commodity prices. Working with a trusted advisor, develop a risk management plan based on profitability goals, hedging strategies, seasonal basis trends and your own risk comfort level. And follow it. But first you’ll need to know your cost of production. That will tell you what price levels you must achieve to cover farm costs and attain profitability. Marketing can be challenging because opportunities may come at unexpected or busy times. Producers do an excellent job of navigating production risk by using the right chemical application and rate to maximize production capabilities. Marketing is much the same—knowing the right tool for the situation can maximize your operation’s financial outlook.

• Focus on financial health. Have enough financial liquidity or cash flow to cover short-term obligations if your business takes a blow. Keep in mind you can design risk management strategies to align with cash flow needs. Equally important, make sure you partner with a strong bank or financial institution that will not only will support you but will be in business itself when you need it.

• Manage for institutional risk. Like it or not, the government is a big part of agriculture today. Tax laws, environmental and labor regulations, the farm bill and the level of price or income support payments are examples of government decisions that can have a major impact on your farm business. But, whether it’s your state’s department of conservation or the IRS, program rules change frequently. Self-education is one way to stay informed about new deadlines and requirements. Be active in your local Farm Bureau, state association or cooperative so you know what’s happening. It’s also a good idea to work with professionals to help you navigate these changes.

• Safeguard human and personal risk. What if you were injured in an accident or got sick and couldn’t handle your farm or ranch responsibilities? Who would run the business in your absence? That’s just one scenario behind the need to address human and personal risk. For starters, make sure you have both health and life insurance.

Further, is there a second-in-command who knows what needs to be done each day if you’re gone? Have family members or key personnel familiarize themselves with your operating agreements so if you get sick, others know who handles what. Update your buy-sell agreements and communicate their stipulations so family and team members know what’s going on. These real-life situations underscore the need for estate and succession planning.

It’s also a good idea to make sure you have a backup who knows your cropping, livestock feed or breeding plans. Are there others in your business who are familiar with your crop insurance deadlines or price hedging plans? What about payroll and other bills? Put business protocols in place so key staff members, your accountant, your marketing advisor and even your lender could step in to meet these responsibilities on your behalf.

Facing the reality of risk and preparing for it now is a smart strategy that will go a long way toward protecting you, your family and your business. As always, work with a seasoned professional to make the most of your risk management planning.

Editor’s note: Maxson Irsik, a certified public accountant, advises owners of professionally managed agribusinesses and family-owned ranches on ways to achieve their goals. Whether an owner’s goal is to expand and grow the business, discover and leverage core competencies, or protect the current owners’ legacy through careful structuring and estate planning, Max applies his experience working on and running his own family’s farm to find innovative ways to make it a reality. Contact him at [email protected].