Risk Management Helps Make Small Farmers Successful
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Risk is an important aspect of the farming business. The uncertainties inherent in weather, yields, prices, government policies, global markets, and other factors that impact farming can cause wide swings in farm income. There are five general types of risk: production risk, price or market risk, financial risk, institutional risk, and human or personal risk.
- Production risk derives from the uncertain natural growth processes of crops and livestock. Weather, disease, pests, and other factors affect both the quantity and quality of commodities produced.
- Price or market risk refers to uncertainty about the prices producers will receive for commodities or the prices they must pay for inputs. The nature of price risk varies significantly from commodity to commodity.
- Financial risk results when the farm business borrows money and creates an obligation to repay debt. Rising interest rates, the prospect of loans being called by lenders, and restricted credit availability are also aspects of financial risk.
- Institutional risk results from uncertainties surrounding government actions. Tax laws, regulations for chemical use, rules for 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 farm business.
- Human or personal risk refers to factors such as problems with human health or personal relationships that can affect the farm business. Accidents, illness, death, and divorce are examples of personal crises that can threaten a farm business.
Risk management involves choosing among alternatives which reduce financial effects that can result from such uncertainties. Family farms account for 97 percent of all farms in North Carolina; 85 percent of these farmers are small farmers. There are three practices that make a small farm successful. These three best management practices are types of risk management:
- Effective cost management
- Active engagement in marketing
- Clear financial and business management
Cost management helps a farmer determine their costs of production and break-even point for each of his/her enterprises with the use of budgets, planning, financial records, and evaluation. Developing a marketing plan helps producers analyze their market strategy so they can improve their position in the market. Strategic planning is analyzing the farm business and the environment in which it operates in order to create a broad plan for the future. It also permits farm families to make more profits in the long run by defining what is more important for the farm operation, allocating resources more efficiently, and anticipating problems and taking steps to eliminate them. With these risk management tools; local farmers can build the confidence they need to deal with both the risks and the exciting opportunities for the future.