4 ways farmers can manage risk in a crisis
Managing risk is second nature to farmers and ranchers. Planting diverse crops to provide staggered harvesting windows and marketing options, buying crop insurance, stockpiling grass and hay for cattle in case of drought, vaccinating calves against disease – all are well-worn risk-management tools.
But then in 2020 came the novel coronavirus, and the concept of risk management took on a whole new meaning. Who could have predicted – let alone planned for – the startling and rapid elevation of a simple hug or handshake of friends, family, and neighbors into a potentially deadly act? Who could have predicted the interruption the disease would bring to the availability of some simple household supplies? And who could have foreseen that the specter of worsening conditions could potentially threaten to choke our access to other staples?
“The coronavirus is a new critter in terms of the risks it presents to farming and ranching operations,” says Jeff Tranel, agricultural and business management Extension economist with Colorado State University. “For instance, how do you keep family members and employees safe during routine trips to town to pick up supplies? And how do you even get certain supplies if the feedstores are closed?”
Learn from history
Stockpiling an inventory of inputs when they’re readily available is one option, but Tranel also sees the potential for a novel and yet indeed, old-school, approach: imagining substitutes. “You may have to think creatively,” he says. “If you can’t buy feed for livestock, for instance, what would work as a substitute? Or how could you manage the livestock in ways not requiring the purchased feed?”
Imagining substitutes was a well-worn practice of folks who lived through the Great Depression of the 1930s – or who learned it from those folks.
To illustrate, Tranel says: “I was raised on a ranch along the Colorado-Wyoming border, 75 miles from town. When preparing meals, my mother had substitute ingredients she could fall back on if she ran out of something. In that same way, farmers and ranchers can manage risk by imagining substitutes or backup plans for times when certain inputs may not be available.”
Such a strategy could modify whole-farm production plans. “You could end up spending less on inputs and seeing reduced yields as a result, but profitability could stay the same,” he says.
get your plan in place
While the coronavirus pandemic may have increased the risks facing farmers and ranchers, it hasn’t changed the basic tenets of risk management. The tried-and-true strategies for mitigating risk begin with the development of a whole-farm risk-management plan.
“Farm and ranch operators who have a risk-management plan in place increase their odds for both the near-term and long-term success of their operations,” says Tranel.
He suggests four steps for developing a plan for managing risk:
1. Consider the five main sources of risk.
Frame the whole-farm, whole-family plan within the context of the ever-present risks associated with finances, production, marketing, human interaction, and legal issues. These shape the overview for managing risk.
“The plan should address what happens if prices dry up, for instance,” says Tranel. “Or what happens if weather reduces quality or yields of crops? Or what happens if the cow herd has fertility problems? Is there a plan to address health issues for people or a plan for the transition of the farm to the next generation?”
2. Take stock of your operation and its course.
Get a reading of your present circumstances by asking, “Where am I?” Says Tranel: “Do an inventory of your land assets and its resources, such as water. Inventory your cow herd and line of equipment.”
Ask yourself, “Where do I want to go?” Answering this question helps you identify your long-range objectives and paint a futuristic picture of what you would like your farm or ranch – as well as family – to look like. Is it a farm producing more diverse crops? Building healthier soil? A ranch where cattle are managed in sync with nature’s rhythms? A farm where profitability is sustained? A farm that is effectively transferred into the hands of the next generation of farmers?
3. Identify action steps.
Setting near- and long-term goals lets you build a path that leads you from your present circumstances to the imagined picture you see of your farm or ranch in the future.
“Well-defined goals can help owners and managers focus energy and efforts,” says Tranel. “Goals can provide a basis for making business and family decisions, and they provide a means for measuring progress. Goals should be SMART, meaning they should be specific, measurable, achievable, relevant, and time bound.
“Just for example, you might establish a goal of generating net farm profit of at least $63,000 every year,” he says. “Or you might set a goal of reducing operating costs by $50 per cow in the next two years. Or reduce debt by $40,000 over the next five years.”
4. Chart a near-term and long-term course of action.
Set a timeline for your goals and the triggers that will instigate each action step. “Each production period has its own timeline,” says Tranel. “If you have a wheat farm, for instance, you know that if you want to harvest at a certain time, you need to plant by a certain time.
“But there are also multi-year timelines,” he says. “What steps will you take over the next decade, for instance, to make room for a son or daughter to join the operation?”
Build flexibility into timelines in order to take advantage of unforeseen opportunities, he says, and to safeguard your operation against unforeseen threats. This flexibility might help you imagine the creative substitutes and alternative management approaches that you could fall back on in the direst of circumstances.
“Managing risk creatively requires forward thinking,” says Tranel. The workbook he coauthored – Agriculture Risk Management – is available at wr.colostate.edu/ABM/Agriskmgmtworkbook.pdf.