Considering ‘extremes’ can help manage farm risk
Research into risk management in mixed farm businesses has highlighted the benefits of focusing on the ‘range’ of values for key profit drivers when planning or budgeting, not just ‘averages’.
The importance of considering what happens at the ‘extremes’ was discussed with Western Australian consultants and farmers attending recent Grain & Graze 2 events, including ‘Optimising Farm Business Risk’ workshops in the grainbelt.
The findings were from farm business profit analyses conducted in WA through the Grain & Graze 2 initiative, supported by the Grains Research and Development Corporation (GRDC) and Caring for our Country.
Planfarm consultant and ‘risk and uncertainty’ project leader Danielle England said the traditional use of averages and ‘static values’ for profit drivers - including yield, price and cost – tended to over-estimate profits and hide the range, or volatility, in those profits.
“When planning or budgeting for a farm business, averages are great for showing how large the profit or loss may be, but do not show how often that profit or loss might occur,” she said.
“Averages from past records may indicate that a loss may occur one in every three years.
“But, like rolling a dice, the reality could be that a farm could incur three losses in a row before having a profitable year.
“If farmers have a more realistic picture of the risks, they can use that information to help make better decisions for their businesses.
“They can decide whether the risk is acceptable and consider the impact that changing their enterprise mix may have on volatility and farm profit.”
Ms England said GRDC investments had boosted the capacity of the risk analysis tool @Risk, which factored in extremes in values for key profit drivers and was starting to be used by WA farm management consultancy companies for farm business analysis and planning with clients.
“@Risk calculates how big or small profit is when extremes in yields, prices and costs occur, how often these extremes occur and which of the variables is contributing most to volatility and business exposure,” she said.
The GRDC-supported ‘Optimising Farm Business Risk’ workshops used case studies of farm businesses to generate profit distribution curves and start discussions about risk management.
The events also covered:
- Identifying risks in the farming business;
- Developing business and personal risk profiles;
- What makes a good decision;
- Managing risk in your business in 2013 and beyond.
Danielle England, Grain & Graze 2
08 9881 1422
Cox Inall Communications
Caption: At a recent ‘Risk in WA Agriculture’ update in Perth are GRDC western regional panel vice chairman Mike Ewing, left, Planfarm consultant and Grain & Graze 2 Risk and Uncertainty project officer Danielle England and Nicon Rural Services consultant and Grain & Graze 2 Risk and Uncertainty project coordinator Cam Nicholson.
GRDC Project Code SFS00020