Introduction to Risk Management for Floriculture Businesses Wen-fei Uva Senior Extension Associate Department of Agricultural, Resource, and Managerial Economics Cornell University Modified by Georgia Agriculture Education Curriculum Office June, 2002 February 1, 2000 Bedding Plants School

What are Risks? Dictionary Definition: Possibility of Loss or Injury For Agricultural Businesses: –Variable Yields –Product Price Uncertainty –Variable Input Costs –Results in Profit Uncertainty or Loss

Increasing Importance of Risks in Horticulture Inherent Risks from the Biological Process Trends of Consolidation and Industrialization –Larger Farms, Higher Productivity –Production Specialization –Larger Retailers, Higher Buying Power Globalization of Markets Little (or No) Government Intervention/Support in Floriculture Commodity Markets Increased Government Regulations Changing Technologies and Consumer Preferences

Source: Floriculture and Environmental Horticulture, USDA New York Floriculture and Environmental Horticulture Production - By Crop Category

U. S. Per Capita Expenditure on Floriculture Products Source: Floriculture and Environmental Horticulture, USDA

Three Principles of Risk Management Risk Aversion –Most People Prefer Certainty to Risk –Will Accept Lower Incomes for Lower Risks –Avoid Changes for Fear of Losses Diversification –Combinations Have Lower Risk Than a Single Alternative - Portfolios –Return-Risk Tradeoffs Insurance - Pay to Lower Risks –Purchase Insurance - Pooled Risks across Individuals –Self-Insurance - Install Irrigation

Five Sources of Risks in Agriculture Production - Weather, Pests, Input Quality and Availability, Technological Changes Marketing - Price Risks, Market Availability and Dynamics Finance - Price Risks and Unstable Cash Inflow. Legal/Environmental - Multi-dimensions related to other risks Human Resources - Related to Farm Owners, Their Families, Management, and Employees.

Responses to Production Risks Diversification –Product Diversification: crops, varieties, stages –Geographical Dispersion Adopt New Technology and Practices –Environmental control –Irrigation and Fertilization –IPM –Input control (supply, soil testing, labor..) Management Information: –records, monitoring Crop Insurance Costs

Responses to Marketing Risks Diversification: products and/or markets Vertical Coordination and Marketing Contracts Marketing Alliances and Cooperatives Direct Sales to Consumers –Opportunities in the urban areas –Many alternatives –Required marketing skills and devote considerable resources to marketing –Maintain high quality –Volume is usually low Management Information

Develop A Strategic Marketing Plan

Responses to Financial Risks Five Dimensions Interest Rate Risk - Cost of debt Liquidity - The ability to pay you cash obligation –Response: Good financial records and analysis of key ratios and projections Solvency - Protect the business equity at adequate level –Response: Keep up-to-date financial records and carefully plan expansion Family Consumption Expenditure Off-Farm Employment and Investment –Income diversification for the farm families

Responses to Legal and Environmental Risks Legal Issues Affected by Other Sources of Risk –Financial –Human Resources –Environmental Regulations Tort Liability –Negligent or intentional injury to property or people in the course of farm business. - Civil Law Suits Intellectual Property/Proprietary Rights Response –Insurance: : Business Liability Insurance, Auto-Insurance –Provide Training –Employment Agreements: Nondisclosure, Non-compete

Responses to Legal and Environmental Risks Environmental Risks - costs arise from environmental regulation and/or damages The trend towards environmental controls is unlikely to reverse Civil or criminal penalties Responses –Soil and water tests –Pest scouting –Proper farm chemical use, storage, and disposal –Training

Responses to Human Resource Risks Sources of Risks Increased Management Complexity –Due to increasing size, capital, and management requirements. –Multiple generation and unrelated owners –Managerial limitations manifested in production risks Loss of Owner Causes Financial and Management Risks –Voluntary –Involuntary: 2D’s + 2I’s Death, Divorce, Illness, Injury

Responses to Human Resource Risks Responses Business and Estate Planning Health, Disability, and Life Insurance Enhance Managerial Resources of Owners and Employee-Managers Increase Range of Specialties Modern Personnel Management/Development Practices Different Management Practices for Seasonal Workers

Conclusions Recognize the Increasing Management and Technology Complexity Identify the Key Risks Determine the Risk-Return Trade-offs Trade-Offs Among Risk Responses Estimate Costs of Risk Responses: Time and Monetary Seek Assistance & Take Charge