Reaping profits with calculated risk management
Author: Arthur Gearon, GRDC northern panellist, Chinchilla | Date: 01 Dec 2015
The onset of the summer storm season has been delivering welcome falls to growers in parts of the northern region.
For some of us, it has also been a stark reminder of the climatic uncertainties we face in agriculture and the value of having a risk management strategy in place.
My local community of Chinchilla was hit particularly hard in early November storms, copping severe hail damage which resulted in partial or, in some cases, total crop wipe out. One assessor anecdotally mentioned having over 40 crop insurance claims to assess.
While we can’t control weather events, we can control our approach to managing risk – some would say that profit made is the reward for managing risk well.
Identifying which risks pose the greatest threat to a business’ bottom line can be helped by undertaking a sensitivity analysis – put simply, a summary of what effect individual risks could have on net profit.
Most farmers know only too well that the effect can be substantial. A sensitivity analysis conducted as part of a farm business case study for the Grains Research and Development Corporation (GRDC) publication Farming The Business, showed that profit can be impacted enormously by a 5% shift in factors like exchange rate, commodity prices and yield.
What makes this even more significant is that commodity prices and yields generally vary far more than 5% between seasons, while costs generally vary by the inflation rate of about 2.5%.
Of course not all risks are easily measured - take for example hail storms – but prior knowledge and experience coupled with scientific modelling can sometimes give an indication to the probability of the risk occurring.
A risk management strategy can then be devised following some simple steps - list the business risks, analyse the likelihood of the risk occurring against the size of the potential financial impact, prioritise the risks and focus on strategies to manage the major ones.
In our case, the risk management strategy incorporated crop insurance. We recognized that with winter harvest coinciding with the onset of the storm season, it was important to cover our potential liability if one of those storms inflicted crop damage.
While we certainly can’t control Mother Nature, we can put some strategies in place to protect our crops and profitability. More often than not, this will consist of implementing agronomic best practice, keeping abreast of the latest research information and having a good, commonsense risk management strategy in place.
If we manage all those factors well, profitability should take care of itself.
For more information on managing risk, see Mike Krause’s recent presentation on Farm business Management Tools at the GRDC Farm Business Updates.
Download a copy of GRDC’s Farming The Business manual.
Arthur Gearon, GRDC northern panellist, Chinchilla
0427 016 658
Ellen McNamara, Cox Inall Communications
0429 897 129