===== PAGE 1 ===== ## AGRIBUSINESS RISK & RISK MANAGEMENT: TAKING CARE OF BUSINESS A.M. Turay, Ph.D. Interim Chair School of Business Kentucky State University ===== PAGE 2 ===== ## Goal of Presentation To give you an overview of the sources of risk and risk strategies to improve outcomes of Agribusiness. To discuss some do's and don'ts, strategies and resources to minimize your risk while maximizing your potential to make money, hire staff, sell more, lose less, and increase customers. ===== PAGE 3 ===== ## Source of Risk: Overview The Five Sources of Risk and Risk Strategies To Make a Profit 1. Production Risk 2. Marketing Risk 3. Financial Risk 4. Legal Risk 5. Human Resource Risk ===== PAGE 4 ===== ### Source of Risk: Overview (Cont.) Thinking of starting a new enterprise? The answer to these questions can help you discover any limited resources you might encounter. 1. What knowledge and management skills do I need? 2. What are added labor needs? 3. Where are the markets? 4. What does your answers tell you? ===== PAGE 5 ===== ## Source of Risk: Marketing Risk ## Marketing Risk Involves: (a.) Price and market uncertainty (b.) Input costs (c.) Outside forces ===== PAGE 6 ===== ### Source of Risk: Marketing Risk (Cont.) ## Outside Forces That Affects Prices & Market Risks Are: Weather Actions of US and foreign governments Farm Programs Regulations Embargoes Trade Tariffs ===== PAGE 7 ===== ### Source of Risk: Marketing Risk (Cont.) ## Personal Considerations for Handling Marketing Risks Include: Know your risk comfort level Improve your current marketing skills and learn new skills Develop an integrated management approach Develop a marketing plan ===== PAGE 8 ===== ### Source of Risk: Marketing Risk (Cont.) ## Ways You Can Handle Marketing Risks: Reduce by avoiding higher risk ventures Shift risk to others Maintain flexibility ===== PAGE 9 ===== ## Source of Risk: Marketing Risk Management Tools ## Reduce Risk and Avoid Higher Risk Ventures By: Knowing current market information Using key business partners Spreading out sales Using contract productions Creating and following your business plan ===== PAGE 10 ===== ### Source of Risk: Marketing Risk Management Tools (Cont.) ## Shift Risks to Others By: Using contracts (cash, forward, deferred) Joining cooperatives Sharing leases Timing or modifying the type of sale Purchasing crop insurance ===== PAGE 11 ===== ### Source of Risk: Marketing Risk Management Tools (Cont.) ## Maintain Flexibility By: Timing sales and/or purchase of outputs/inputs Placement where and from whom your sales/purchases are made Different forms of sales and input purchase ===== PAGE 12 ===== ## Source of Risk: Financial Risk ## Financial Risk Develops From Regular Business Activity Costs and availability of debt capital Ability to meet cash flow needs Capability of generating additional equity ===== PAGE 13 ===== ### Source of Risk: Financial Risk (Cont.) ## Other Financial Risk Can Be Attributed To: Poor planning Failure to maintain control of the operation Lack of financial understanding ===== PAGE 14 ===== ### Source of Risk: Financial Risk (Cont.) Cost and Availability of Debt Capital Money or capital that comes from sources outside of the operation such as bank loans Work with your lender to create a solid relationship and reduce your financial risk when: a.) There's an increase in interest rates or interest expenses from variable rate loans b.) You need to borrow and access credit to maintain flexibility ===== PAGE 15 ===== ### Source of Risk: Financial Risk (Cont.) Ability To Meet Cash Flow Needs Typical Financial Obligations Include: - Production expenses Debt payment Property taxes - Insurance - Family living expenses ===== PAGE 16 ===== ### Source of Risk: Financial Risk (Cont.) ## Keep or Increase Your Profitability By: Maintaining effective and up-to-date records Implementing a professional financial plan ===== PAGE 17 ===== ### Source of Risk: Financial Risk (Cont.)
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2. Develop Your Financial Goals 1. Determine Current Financial Situation
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Identify Alternative Course of Action The Financial Planning Process 6. Review & Revise the Financial Plan 5. Create & Implement Your Financial Action Plan Evaluate Alternatives a. Assess - Risk - Time Value of Money (Opportunity Cost) b. Consider - Life Situation - Personnel Values - Economic Factors ===== PAGE 18 ===== ## Source of Risk: Managing Financial Risk ## Manage Your Financial Risk By: Determining your acceptable risk levels Putting controls and tracking mechanisms in place to maintain your acceptable risk levels ===== PAGE 19 ===== ### Source of Risk: Managing Financial Risk (Cont.) ## Other Ways To Manage Your Financial Risk Are: Budgeting cash inflows and outflows Maintaining accurate and up-to-date financial records Conducting a basic financial analysis Developing annual financial statements ===== PAGE 20 ===== ## Source of Risk: Legal Risk ## Legal Risks Include: - Business structure - Contracts Tort Liability Statutory Compliance ===== PAGE 21 ===== ### Source of Risk: Legal Risk (Cont.) ## Business Structure Has Many Forms Corporations Limited partnership Limited-Liability companies Partnership Sole Proprietorship Trusts ## They all have an affect on: Income and property taxes Estate planning and transfers ===== PAGE 22 ===== ### Source of Risk: Legal Risk (Cont.) Contractual Agreements are part of the day-to-day management of most agricultural businesses The five types of contracts that can affect your legal risk are: 1. Leases or crop-share arrangements 2. Federal program agreements 3. Insurance instruments 4. Labor ===== PAGE 23 ===== ### Source of Risk: Legal Risk (Cont.) Tort and tort-liability law is primarily concerned compensation to someone injured or damaged by a wrongful act or omission ## Include acts of: 1. Negligence or intentionally caused damage related to: a. Farm injury b. Farm discharges 2. Non-disclosure of known farmstead hazards ===== PAGE 24 ===== ### Source of Risk: Legal Risk (Cont.) Statutory compliance is defined as meeting regulations imposed by government agencies on your operation Statutory compliance risks arise from the failure to follow regulations governing the operation of your business ===== PAGE 25 ===== ## Source of Risk: Human Resource Risk Human resource risks may arise when business activities require working with other people. These would include but are not limited to personnel issues such as: Hiring and/or firing employees Injury, illness, or death ===== PAGE 26 ===== ## THANK YOU! QUESTIONS/COMMENTS