What is risk management in agriculture?

The agricultural operating environment over the last twelve months has experienced a range of external influences that have been more challenging than any other in recent times and the associated economic impacts feature consistently in our conversations.

If anything, these circumstances have expanded the need to develop a deeper and more complex debate about risk.

  1. What is risk?

    The Oxford dictionary has among its definitions:

    To hazard, endanger , expose the chance of injury, and

    To venture upon, take a chance.

    Additionally;

    Risk is about the uncertainty of outcomes.

    Risk is judging the consequences of an outcome in conjunction with assessing the likelihood of a positive or negative outcome, two (2) parts.

    Naturally, an event that is likely to have a significant impact with a higher likelihood of occurring is one which would prompt a higher-level response. For example, a commodity buyer, to whom you have sold a commodity, becoming insolvent, would have a material consequence. You may take additional steps to seek the security of payment,    or you may decide that risk and return have become unbalanced.  I can recall a grains industry participant once saying “beware, anyone who is $20/tonne over the market, they have no intention of paying”.

  2. The risk appetite

    It is important that headline risks – those risks where catastrophic consequences could lead to business failure – are kept in clear focus. However, while discussion around risk often centres on loss, an appropriate assessment of risk also considers opportunity.  The true consideration is the balance between risk and return.  Should a business owner pursue opportunities with a higher apparent return while accepting that to do so may incur a higher risk?

    What is the right balance between risk/return? It’s an individual decision.

    The risk appetite is a strategic consideration. How much risk is a business prepared to accept?

    This will be influenced by capital requirement, liquidity preferences and organisational capability.  For example, investing in a genetic development program utilising IVF techniques will require a detailed consideration of required management knowledge and capability.

  3. Risk identification

    Long-range market considerations may include such elements as whether there is a viable market for our product OR what may be the impact of changes in technology OR will there be a disruptive influencer or an enabler of our plans.

    Financial risk assessment might consider the balance between equity and cash flow. A business with robust cash flow might support lower equity levels.  In addition, do you wish to fund long term assets with long term debt agreements? Do you have an exposure to currency exchange or commodity market variability? What is the state of our banking relationship – is it supportive and collegiate?

    The third level of risk to explore is operational. The type of risks that might apply to a livestock operation might include:
        • Market integrity and welfare.
        • Understanding animal performance.
        • Understanding genetic performance.
        • Linking stocking rate to carrying capacity linking to rainfall.

Determining your appetite for risk across your operations by thinking about the balance of return you are hoping for, identifying specific risks and their mitigations and finally ensuring that you have ongoing stewardship over your risk profile, is a complex endeavour. This article is not intended to be a comprehensive guide to that exercise but to stimulate your thinking in this area.

If we can help expand on this conversation with you, please contact us any time and, we’ll be happy to help. Call us on 1800 624 688 or send us an email to sales@practicalsystems.com.au

Mark Morton,  Executive Director – Sales

The information provided in this article is general in nature and does not take into account your personal circumstances, needs, objectives or financial situation. This information does not constitute as financial advice. Before acting on any information in this article, you should consider its appropriateness in relation to your personal situation and seek advice from an appropriately qualified and licensed professional.