Take home messages

• Good farm management involves managing uncertainties and risks, requiring a careful balance between acceptable levels of risk and desired returns to ensure both immediate and long-term profitability and economic resilience.
• Employing decision-making frameworks, such as decision matrices, helps farmers systematically evaluate their options by integrating data and intuition. This approach allows for more balanced, informed choices that align with the farm’s risk appetite and objectives.
• Focusing on strategic planning is worthwhile for farm business. Having structure in decision making processes and effective business planning supports longer-term sustainability and profitability.

Farm management is the process by which resources and situations are manipulated by farm managers in trying, with less than full information, to achieve their goals (Dillon . 1980).

The ability to reorganise in the face of change is the key to survival and success in farm management (Malcolm et al. 2005).

Introduction

Farming, inherently, is a business rife with uncertainties and risks. The volatility of weather patterns, market fluctuations, and the unpredictable nature of biological systems make decision-making a complex endeavour for farm businesses no matter the size. Risk isn’t always about downsides, however. Any risks to a farming business also carry opportunities from which to profit. So, managing a farm business becomes a balancing act of trading an acceptable level of risk for an acceptable level of return.

At the core of sustainable farming enterprises lies the obvious goal of profitability. This pursuit of profit is essential not just for immediate financial gain but also for long-term wealth accumulation. Wealth provides choices, opportunities, and freedom, empowering farm businesses to adapt and thrive in a changing environment. At the end of the day, economic resilience is business resilience and gives you choices to adapt in the face of change. This paper will delve into some of the fundamentals of farm management decision making, with a focus on risk and uncertainty and frameworks to enhance the process.

Managing Risk and Uncertainty

To stay productive and profitable, farmers must make changes to the way that they operate in the face of change. That requires managers to take a longer-term view of risk and uncertainty. Risk is best defined as that of which a probability or likelihood of an outcome can be estimated or known, whereas uncertainty is when the probability or likelihood of an outcome cannot be estimated and is unknown. Considering risk means giving thought to what is knowable or imaginable about the future. Managers must then try to quantify the risk, assess what parts of the outcome are uncertain, and make the best decision with the available information at the time. Ultimately, this must be done based on the goals of the business. What is an acceptable risk-return trade-off to one business might not be to another.

Analysing a risky decision can be broken down into two parts (Hardaker, J.. (2006).):

1. An assessment of the decision maker’s beliefs about the probability of the possible consequences, which can be defined as the likelihood of an outcome estimated from the decision maker’s knowledge and experience; and
2. An assessment of the decision maker’s relative preferences for those consequences, which are informed by the decision maker’s beliefs and goals.

These two elements create an understanding of the subjective expected usefulness of a risky decision, which leads to the choice or “good” option being the option with the most usefulness based on not only the risks, but the appetite for risk of the decision maker, and the individual goals and objectives.

A “good” decision doesn’t always turn out to be the “right” decision. Whether or not a decision turns out to be “right” usually reveals itself with time when the anticipated risks and uncertainties have been revealed. Whether or not a decision is “good”, usually depends on the prudence with which it is made. When it comes to decision making, it’s more important to worry about making a “good” decision than predicting whether or not that decision will be “right”. After all, most decisions carry some level of uncertainty.

Decision Making Under Risk & Uncertainty

Good decision-making in farm businesses involves a thorough understanding of the consequences and likelihood of various actions, appreciating potential regrets, and identifying steps to enhance favourable outcomes while reducing negative results. This process begins with gathering and analysing relevant data, considering historical performance, current conditions, and future projections.

A thorough understanding of the odds of different scenarios helps farm managers make informed choices. Acknowledging the potential for regret means being realistic about what could go wrong and how you might feel about it. This honesty helps in weighing options more carefully. The best choice for a decision maker is usually the one whose consequences they can live with, whether they are favourable or not.

Good decision making is vital because farmers are presented with choices to make regularly, even if the decision is to do nothing. Making good decisions is ultimately part of ensuring long-term sustainability and profitability.

A decision matrix is a valuable tool for structured decision-making, especially for complex or high-stakes decisions. The matrix provided by GRDC in 2020, Farm Decision Making: The interaction of personality, farm business and risk to make more informed decisions is a good example. This matrix involves several steps:

1. Clearly Define the Decision: Identify the specific decision that needs to be made.
2. List Major Considerations: Determine the key factors that should influence the decision. Usually, there are four to eight major considerations, such as financial impact, resource availability, market conditions, and potential risks.
3. Break Down Considerations into Conditions: For each major consideration, identify different scenarios or conditions that could influence the decision. For instance, financial impact might be broken down into high, medium, and low revenue projections.
4. Assign Scores to Conditions: Assign scores to each condition based on its importance. Lower scores typically represent less favourable outcomes, while higher scores indicate more favourable ones.
5. Create a Decision Table: Organize the considerations and conditions into a table, making it easy to compare and evaluate the different scenarios.
6. Calculate Total Scores: Add up the scores for each scenario to determine which option has the highest overall score.
7. Review and Adjust: Test the decision matrix with historical data or hypothetical examples to ensure its accuracy. Adjust the scores and conditions as necessary based on new insights or feedback.

This process helps in systematically evaluating the pros and cons of each option, leading to more balanced and informed decisions.

Using decision-making frameworks does not disregard instinct, flexibility, or the value of human intelligence and experience. Instead, it incorporates these elements into a consistent and structured approach. Although a decision matrix provides a logical structure, it also leaves room for gut feelings and emotional considerations, ensuring that decisions are well-rounded.

This structured approach helps mitigate biases by providing a clear rationale for decisions, enhancing confidence in the process. It allows farm managers to be flexible, as they can adjust their strategies based on new information or changing conditions, while still adhering to a consistent decision-making process. By integrating instinct and experience into a systematic framework, farm managers can make more confident, transparent, and accountable decisions.

As Kelly and Malcolm (1999) aptly write, sometimes, “For sound farm management decisions it is not necessary to know everything about everything- enough about enough will do.”

Planning For Resilience

Resilience is defined as: “the ability of a substance or object to spring back into shape; elasticity.” Resilience is a defining trait of successful farm businesses, enabling them to withstand “shocks” to the system and adapt to changing conditions. Resilience is not just about being flexible, it’s about being adaptable. Farm business strategies should be focused on cultivating the overall strength of the enterprise. Embracing a holistic approach to farm management is necessary. There’s no point getting stuck on what rate of nitrogen to apply this year when you should be focusing on how the whole system is running.

Goal setting should be the point to start with for all farm business planning. And goals do change – so it’s worth writing it out in pencil! Developing a vision for your business gives a clear framework for decision-making. Medium to long-term goals offer a strategic vision that helps guide and direct short-term actions, ensuring that daily operations are aligned with the broader objectives of the farm.

The process can start with an assessment of the current state of the farm. Where are you at? This could include assessing financial health, business health, resource capacity, and the state of the market. Identifying where you’re at now will provide a starting point for where you want to go, and what drives the “vision” of your enterprise.

The status quo becomes the impetus for change. Good goal setting can include the development of Specific, Measurable, Achievable, Relevant, and Time-bound (SMART) goals.

• Specific: Clearly defined and unambiguous, answering the questions of who, what, where, when, and why.
• Measurable: Quantifiable, with criteria to track progress and measure the outcome.
• Achievable: Realistic and attainable, considering the resources and constraints.
• Relevant: Aligned with broader objectives and priorities, ensuring the goal is worthwhile.
• Time-bound: Set within a specific timeframe, with a clear deadline or end date for completion.

The SMART method is so often used as it provides clarity for the here and now when the future seems very far away. Tracking performance in achieving these goals can also be a useful tool for identifying what is working and what isn’t, so any business strategies can be adjusted as needed. Finally, scenario planning and risk assessment are essential, allowing the farm to anticipate potential challenges and develop contingency plans. This structured approach ensures that most, if not all short-term actions are strategically aligned with the medium to long-term goals. By having well-defined goals, farmers can make informed decisions that not only address current challenges but also contribute to long-term sustainability and profitability.

Farming enterprises are complex ecosystems interacting with the climate, annually, the environment, locally, and the market, globally. Beyond traditional production-oriented strategies, holistic farm management encompasses all aspects of the business - this includes how much you pay yourself and how often you take time off -  as integral components of farm sustainability.

Although it can be hard to think about farm business planning when so much time is spent working “in” the business, having the discipline to work “on” the business should be treated with as much importance as getting the technical aspects of farming right.

Conclusion

In conclusion, managing farm business risk, developing structured approaches to decision making, farm business planning and goal-setting setting is imperative for the long-term sustainability and resilience of agricultural enterprises. By embracing a holistic approach to farm management, farmers can navigate risks and thrive in a dynamic agricultural landscape. The Resilient Farming Tas program is a valuable resource currently available for farmers seeking to enhance their resilience and ensure the prosperity of their agricultural enterprises.

And as always, sometimes it’s just a little good luck, good timing, and good management.

References

Dillon, J.L. (1980). The Definition of Farm Management', Journal of Agricultural Economics 31(2): 257-258.

Kelly, Hugh & Malcolm, Bill, 1999. "Economics in Technical Models of Farm Systems - Better none than some," 1999 Conference (43th), January 20-22, 1999, Christchurch, New Zealand 123826, Australian Agricultural and Resource Economics Society.

Malcolm B, Makeham J, Wright V. The Farming Game: Agricultural Management and Marketing. 2nd ed. Cambridge University Press; 2005.

Hardaker, J.. (2006). Farm Risk Management: Past, Present and Prospects. Journal of Farm Management. 12.

Contact details

Naomi Palombi
naomip@rmcg.com.au
0417457474