A flat tire can quickly ruin your day. On the other hand, truck or tractor tires that are well-inflated and strong can carry you through the ruts, rain, snow, and other obstacles that come across your path. We all know which situation we prefer to be in.
That analogy is how Kevin Bernhardt described farm risk management in a recent University of Wisconsin-Extension webinar. Each area of your business that is susceptible to risk or uncertainty — labor, marketing, financial, and legal, to name a few — can be thought of as a spoke in the wheel of your farm’s resiliency to challenges. Where you are prepared for risk to an area, the spoke is strong and contributing to resiliency. But areas where you are unprepared for risk leave the spoke unsupportive and you with a misshapen wheel, making it more difficult to get through the “muddy” times of farming.
“So, we want to pay attention to all the different kinds of risks to have a nice round wheel,” the farm management specialist and agribusiness professor noted.
Dealing with risk and having a resilient business means you have the power and ability to return to normal business operations and profitability after taking a punch like low prices or a weather event, added extension educator Katie Dunn. Along with adequate capacity and performance, resilience is what contributes to long-term farm viability.
Strengthening the spokes
How do we think strategically about being prepared for risk? Bernhardt laid out four steps, beginning with identifying potential risks for your business. This could come from your own experience or that of friends and neighbors. Attending conferences could be a good way to learn about risks. You can also read industry, farm, university, or other publications, he said. Walking through the farm with trusted consultants or even other farmers can shine a light on where you are susceptible to risk, too.
Next, assess the potential impact of each risk to recognize how urgent action is needed on the identified risk. This is a combination of how likely it is that the risk will occur and how painful it would be. Bernhardt illustrated that a low probability and small financial impact would suggest no action is necessary, while a high-probability event that would have a significant impact on the viability of the farm should be addressed immediately. Many risks will fall somewhere in between those two extremes.
Once you know which risks to focus on, develop mitigation strategies. Bernhardt identified a few ways to address risk, and he shared examples of potential actions to take in the context of a farm owner becoming disabled:
• Can I reduce the probability of this happening? In the example of preventing disability, take good health measures and maintain a safe facility.
• Can I reduce the impact of the risk if it does occur? This could include having a co-manager, clearly defined standard operating procedures, and an organized office where other people can find necessary information.
• Can I transfer all or some of the cost of this risk to someone else? This strategy covers insurance; in this example, life or disability insurance can be key.
• Can I completely avoid the source of risk? In this case, probably not, but perhaps in other areas of risk, responsibilities can be shifted around or the business plan changed.
• Do nothing but acknowledge the risk and plan for it. Maybe no action needs to be taken because it is a low probability risk with little financial impact, but at least recognize it is a possibility by preparing for it.
Putting the mitigation strategies into place is the final key. All of the good intentions in the world don’t do much if a risk comes to fruition and you haven’t acted on your plan. “Once the risk happens, the ability to do something about it is over,” Bernhardt said.
When a plan is set, check up on it every so often to make sure it is still working, that it’s not harming the business in any way, and that you’re preparing for anything you can. Making time to take these steps isn’t always urgent, Bernhardt said, but it can be very important to building a resilient foundation for your business.