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Risk management and managing a farm

There are many aspects to consider to help ensure you'll have a successful operation

Most of us in agriculture are aware of the risks involved. Any biological system that makes long-term plans around both Mother Nature and human nature is bound to have challenges. Managing through these challenges can create some exciting times and opportunity.

Grass

Having grass is one of the best defences against risk in the cattle business. There are a couple of philosophical differences present in the industry. One is that any ungrazed grass is a “waste” and the flip side is that ungrazed grass represents a positive balance that can be drawn on if needed. I confess I am firmly in the latter camp. Extra grass helps to buffer against drought and provides marketing flexibility by carrying cattle extra days if the market decides to do an about face. Available grass can allow you to hit different weight and marketing end points at a low cost.

Cost control

Cost control walks a fine line and is probably best expressed in importance on a per sale unit basis. Production is important and there are a lot of herds that obtain great levels of production, such as high weaning weights. In some cases these herds may have a higher cost per calf than another herd, but a lower cost per weaned or saleable pound. Keeping the cost per saleable pound down allows us to sell at lower prices and still generate a profit. It helps to remove the need to always target the highest market or reach prices above what the market is providing. This is an area that deserves special attention in the current situation since it is easy to let costs slide up when the markets are strong.

Weather

As always weather is always a risk and often there is little we can do about it. Short of having facilities, there are choices we can make about calving seasons and feeding methods/systems, but there are also several options available in terms of crop and moisture insurance products.

Health programs

A good herd health program can provide huge risk management benefits. Covering one of your largest assets (cow herd) and cash crops (calves) with a preventative herd health program is usually money well invested. Vaccination for prevention of breeding and calf hood diseases is relatively low cost and highly effective.

Price insurance

Calf, feeder and fed price insurance has been available in Alberta for a while and it has recently been rolled out across the Prairies as an option. This product is worth looking into as it provides some floor pricing on calves at various stages of production, while still allowing for upside price discovery. Additionally, there are no margin calls or need to maintain a hedging account with a broker. For more information about the program you can visit http://www.wlpip.ca/. The caveat as always here is that you have to know your costs in order to plan to market at a profit.

Loan structures

One of the biggest risks to industry right now may be the level of debt financing and the potential risk from rising interest rates. It is possible to insulate yourself from a lot of this risk through a couple of strategies, including locking in an interest rate. The real risk of rising interest rates lies in the potential impact on cash flow, as interest can eat up cash in a hurry. Some other options worth considering may be some of the loans with the option to make interest-only payments. Also depending on your debt/equity position it may be worthwhile considering a rapid debt repayment schedule if you think interest rates are set to rise.

Communication

This is perhaps the least discussed and is one of the most effective and lowest-cost risk management tool available. Effective communication includes accessing current news and market reports (like Grainews and other farm media), but it also requires a proactive approach such as communicating plans and financial position with your lender and accountant or discussing your marketing plans with buyers or the local auction market. In a lot of cases, just informing folks that you are alive and kicking and trying your best will create opportunity and encourage others to want to help you succeed.

Ourselves

Perhaps the most overlooked form of risk on a ranch is the risk manager — that is the people (or person) involved in running things. Our businesses are often structured so that it is “easier to just do it myself” and difficult to train others, or some farms and ranches are set up for hard work 24/7. Having only one person that can operate things creates a dangerous single point of failure, just as having no slack in the work schedule can create tremendous challenges if something like a personal health issue arises.

Additionally, singular viewpoints on a rapidly changing industry can create situations that are difficult to manage through. Personal health insurance, cross training or establishing low-labour systems can be useful strategies to reduce some of these risks. An example of this at our place is having my son along when we move fences for bale grazing. In this way, if I were unable to complete the task for some reason, I have a well-trained and able replacement who can feed cows in a low-labour situation. Investing in education for yourself and others involved in your operation is also a good strategy to help broaden our exposure to other ideas and management paradigms.

There are a lot of ways to manage risk in a risky business and it is likely that skill in managing risk is becoming one of the key differentiators between successful and not so successful operations. This article obviously cannot cover all of the ideas and strategies for managing all types of risks in all types of situations, but hopefully it gives a few ideas that may be useful. I would encourage any folks with their own thoughts to feel free to contact me.

About the author

Contributor

Sean McGrath is a rancher and consultant from Vermilion, Alta. He can be reached at [email protected] or (780) 853- 9673. For additional information visit www.ranchingsystems.com.

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