Pacific Northwest & Alaska Risk Management Education Regional Conference Pacific Northwest & Alaska Risk Management Education Regional Conference u March.

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Presentation transcript:

Pacific Northwest & Alaska Risk Management Education Regional Conference Pacific Northwest & Alaska Risk Management Education Regional Conference u March Spokane, Washington

Managing Risk Through Diversification & Technology Paul Patterson Agricultural Economist University of Idaho CES

Managing Risk: Diversification & Technology u Risk: ä The probability of an adverse effect äThe possibility that an outcome or event will not meet expectations

Managing Risk: Diversification & Technology u Step One: ä Know your financial situation ä Analyze and understand recent trends in your financial situation

Managing Risk: Diversification & Technology u Step Two: ä Awareness of Factors Affecting Supply & Demand - Current Situation - Recent Changes - Long Term Trends

Managing Risk: Diversification & Technology u Environmental Awareness ä 1996 FAIR Act - Eliminates Supply Management (Acreage Reduction Program) - Eliminates Income Stabilization (Deficiency Payments) - Phases Out Income Support (Market Transition Payments)

Managing Risk: Diversification & Technology u Environmental Awareness ä Global Issues - Tightening World Grain Stocks - Reduced Government Involvement - Trade Agreements / Reduction in Trade Barriers

Managing Risk: Diversification & Technology u Environmental Awareness ä Factors Affecting Price Volatility - No constraints on acreage adjustments - Reduced government stocks - Immediate response to market signals

Managing Risk: Diversification & Technology u Environmental Awareness ä Trends - Increasing farm size - Increased specialization - Attribute-differentiated products - Fashion or niche markets - Identity preserved products

Managing Risk: Diversification & Technology u Environmental Awareness ä Trends - Partnership with suppliers & purchasers - Proprietary information & technology - Industrialization of farms - Concentration - Reduced political influence

Risk management strategies must fit your circumstances, the current business environment, and must integrate production, marketing, financial, legal and human risk.

Managing Risk: Diversification & Technology u Diversification to Manage Risk ä Objective: Maximize net return while reducing income variability

Managing Risk: Diversification & Technology u Types of Diversification: ä Additional Enterprises ä Different Mix of Enterprises ä Differentiated Product

Managing Risk: Diversification & Technology u Types of Diversification: ä Specific Attribute Product ä Value-Added Product ä Non-Farm Income & Investments

Managing Risk: Diversification & Technology u Diversification Issues: ä Product Form &/or Specifications ä Market Location & Availability ä Yield Variability ä Price Variability ä Price Discovery

Managing Risk: Diversification and Technology u Diversification Issues: ä Size/Scale Restricts/Requirements ä Product Volume Constraints ä Special Management Skills ä Production Practices/Technology ä Credit Availability

Managing Risk: Diversification and Technology u Diversification Issues: ä Counter to Need to Specialize as Technical Knowledge Increases ä Comparative Advantage / Disadvantage ä Competitive Advantage / Disadvantage ä Net Return Variance and Covariance

Managing Risk: Diversification & Technology u Technology’s Role In Managing Risk ä Objective: Improve management and production efficiency ä Compare benefits to costs

Managing Risk: Diversification & Technology u Technology’s Role In Managing Risk ä Technology is more than high tech and biotech

Managing Risk: Diversification & Technology u Technology Benefits ä Cost Reducing ä Yield Enhancing ä Quality Enhancing ä Price Enhancing ä Provides Market Access ä Provides Management Information

Managing Risk: Diversification & Technology u Technology Negatives ä Increased Costs ä Increased Risk ä Applicability Based On Size/Scale äConsumer Rejection/Acceptance äEnvironmental Risk

Managing Risk: Diversification & Technology u Transition Planning ä Feasibility ä Startup Costs ä Additional Credit Needs ä Cash Flow Requirements ä Financial Risk Consequences

Managing Risk: Diversification & Technology u Transition Planning Tools ä Budgeting: - enterprise, partial, whole-farm ä Accounting Software: - projected cash flow ä FINPACK: - comprehensive financial planning and analysis package

Managing Risk: Diversification & Technology u Measuring Risk ä Variance In Net Returns ä Relative Importance of Positive and Negative Variance ä Historical Data - Does history repeat itself?

Managing Risk: Diversification & Technology u Relationship of Risk and Profit ä High Risk = High Potential Profit ä Low Risk = Low Potential Profit

The objective of risk management is not to eliminate risk. Risk management is taking the right risks to maximize profit while reducing income variability and meeting financial obligations.