Chapter 15: Managing Risk and Uncertainty

Risk

Possible outcomes and chances/probability of occurring are known

Uncertainty

Both possible outcomes and probability are unknown

Production and Technical Risk

Weather, diseases, genetics and technology

Price and Market Risk

Price variability, market access, consumer demand

Financial Risk

willingness to lend

Legal Risk

regulation, food safe, withdrawal periods

Factors that affect an organization’s ability to bear risk

• Financial reserves

• large amount of equity capital can stand larger losses before insolvent

• high-leveraged farms with high value of debt

• Cash Flow commitments

• Household with high fixed income

General Approaches for Managing Risk

1. Reduce variability of possible outcomes

2. Set minimum income or price level, usually for a fixed charge

3. Maintain flexibility

4. Improve risk bearing ability 

Tools to address Production risk

• Stable enterprises to create income through modern technology

• Diversification

• Property Insurance

• Crop Insurance

• Other crop programs

• Livestock insurance

• Extra Production Capacity 

• Share leases

• custom farming and feeding

• input procurement 

Tools to address market risk

• Spreading Sales

• Contracting Sales

• Hedging

• USDA programs

• Flexibility 

Tools to address Financial Risk

• Fixed interest rate

• Self-liquidating loans

• Having liquid financial reserves

• credit reserves

• Owner equity

Tools to address Legal Risk

• Business Organization

• Estate Planning

• Liability Insurance

Tools to address risk

• Health Insurance

• Life Insurance

• Safety Insurance

• Backup management

Describe the 5 Cs of Credit

1. Character

2. Capacity

3. Capital

4. Collateral

5. Conditions

Important Considerations in the relationship between a borrower and a lender

• Personable

• Expertise

Risk Rating System

• Approach to credit risk assessment that identifies borrowers’ potential default and magnitude of potential loss