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Business decision making is all about risk. Without risk there is little profit to be earned. In general the higher the risk the greater the profit potential. How should a farmer manage the risks associated with their enterprise?

There are three risk areas – production, marketing and financial that are considered here. There are ways of managing all of these.

Production risk relates to weather, pests, disease, and weed infestations. In addition, reliability of machinery is a risk.

Whilst we are not able to change the weather a farmer will reduce risk by choosing carefully what crops to grow. There was a large expansion in forage maize grown in the UK over the last 20 years, but this is now reducing as farmers in higher rainfall areas start to question the viability following years of low yields. In some areas there is a move towards whole crop cereals away from maize.

In the 20th century sprays were heavily used improve crop yields. However, we are seeing problems with this as resistances are built up – blackgrass is a real problem now. Will there be a return to more widely used rotations of crops and even fallow land in some years?

In livestock farming the industry has developed drugs to deal with many problems, but there are question marks over the long term sustainability of this.

Increasingly selling part of the farm output forward can be a way of reducing risk. Whilst arable farmers have sold part of their crop for a known price to ensure a level of profit has been common it is not so common in livestock enterprises.  How many farmers would like to sell 80% of their milk at a known price and take a gamble on the rest? What price would be worth considering?

Selling direct is often seen as a good method of raising profits. This can be so, but each decision must be carefully thought out. There are some fantastic examples, but often in selling direct there has to be a unique attribute to the idea.

Selling just one product from a farm can be seen as being a way to maximise profits but it can also mean that when times are bad the whole farm is at risk. Starting anew enterprise alongside the existing main business is something to be looked into very carefully. Examples are ‘green energy’, holiday businesses, but also storage. Even a farmer working part time in an unrelated industry can help smooth income in bad times.

Machinery risk is extremely relevant. There are incentives from Government through tax reliefs to encourage investment in modern machinery. The cost of machinery has continued to escalate and as machines become more complex new machines need specialist maintenance.                                                            

Marketing has become much more important as subsidies have changed and the market has opened up with a wider range of buyers – no longer do we have the marketing boards committed to buying all produce. Now when the market is short of supply the price paid can rise quickly, but equally in over supply prices fall very quickly and individual quotas are enforced. There is a choice of buyer and an individual’s attitude to risk will drive that choice. Selling through a cooperative is considered less risky, but risk takers tend to sell to a Company. There are successes and failures in these businesses and many farmers have been caught at least once by the decision from a buyer to leave the market.

Financial risk is a complex subject, but how many people invest in something in the ‘hope that it will rise in value faster than inflation’. Land has been a good example. Over recent years’ land values went up more quickly than inflation so land capital growth was more important than its trading potential. Over investing in assets that will not show a reasonable trading return is a very risky option and must be considered very carefully.

 

Whatever the decision being considered it is important to carefully work out a plan for that investment and to consider the options should the plan be derailed. Please talk to us, we regularly work with farmers on these decisions.