Risk management contributes to the success of small farmers
LUMBERTON – Risk is an important aspect of the farming business. Uncertainties inherent in weather conditions, yields, prices, government policies, world markets and other factors that affect agriculture can cause large fluctuations in farm income.
There are five main types of risk: production risk, price or market risk, financial risk, institutional risk and human or personal risk.
– Production risk arises from uncertain natural growth processes of crops and livestock. Weather conditions, disease, pests and other factors affect both the quantity and the quality of the commodities produced.
– Price or market risk refers to the uncertainty about the prices that producers will receive for commodities or the prices they have to pay for inputs. The nature of price risk varies considerably from product to product.
– Financial risk arises when the farm business borrows money and creates an obligation to repay a debt. Rising interest rates, the prospect of loan repayments by lenders, and the limited availability of credit are also aspects of financial risk.
– Institutional risk results from the uncertainties surrounding government actions. Tax laws, regulations relating to the use of chemicals, rules relating to animal waste disposal, and the level of price or income support payments are examples of government decisions that can have a major impact on the agricultural enterprise.
– Human or personal risk refers to factors such as human health problems or personal relationships that can affect the farming business. Accidents, illnesses, death and divorce are examples of personal crises that can threaten a farming business.
Risk management consists of choosing among alternatives that reduce the financial effects that may result from such uncertainties. Family farms represent 97% of all farms in North Carolina, and 85% of those farmers are small farmers.
There are three practices that make a small farm successful. These three best management practices are types of risk management. They are effective cost management, active engagement in marketing, and clear financial and business management.
Cost management helps a farmer determine their production costs and breakeven point for each of their businesses using budgets, planning, financial records, and evaluation. Developing a marketing plan helps producers analyze their market strategy so that they can improve their position in the market. Strategic planning involves analyzing the farm business and the environment in which it operates in order to create a broad plan for the future. It also enables farming families to make more long-term profits by defining what is most important to the farm operation, allocating resources more efficiently, anticipating problems and taking action to eliminate them.
With these risk management tools, local farmers can build the confidence they need to face both risks and exciting opportunities for the future.
Nelson Brownlee is an Area Extension Farm Management Officer for North Carolina Cooperative Extension, Robeson County Center. He can be reached by dialing 910-671-3276 or by email at [email protected]