Pacific Northwest & Alaska Risk Management Education Regional Conference

Pacific Northwest & Alaska Pacific Northwest & Alaska Risk Management Risk Management Education Regional Education Regional

ConferenceConference

March 24-25 Spokane, WashingtonMarch 24-25 Spokane, Washington

Managing Risk Through Diversification & Technology

Paul PattersonAgricultural EconomistUniversity of Idaho CES

Managing Risk Through Diversification & Technology

Paul PattersonAgricultural EconomistUniversity of Idaho CES

Managing Risk: Diversification & TechnologyManaging Risk: Diversification & Technology

Risk:Risk:

The probability of an adverse effectThe probability of an adverse effect

The possibility that an outcome or The possibility that an outcome or event will not meet expectationsevent will not meet expectations


Step One:Step One: Know your financial situationKnow your financial situation

Analyze and understand recent Analyze and understand recent trends in your financial situationtrends in your financial situation


Step Two:Step Two: Awareness of Factors Affecting Awareness of Factors Affecting

Supply & DemandSupply & Demand

- Current Situation- Current Situation- Recent Changes- Recent Changes- Long Term Trends- Long Term Trends


Environmental AwarenessEnvironmental Awareness 1996 FAIR Act1996 FAIR Act

- Eliminates Supply Management- Eliminates Supply Management(Acreage Reduction Program)(Acreage Reduction Program)

- Eliminates Income Stabilization- Eliminates Income Stabilization(Deficiency Payments)(Deficiency Payments)

- Phases Out Income Support- Phases Out Income Support(Market Transition Payments)(Market Transition Payments)


Environmental AwarenessEnvironmental Awareness Global IssuesGlobal Issues

- Tightening World Grain Stocks- Tightening World Grain Stocks- Reduced Government Involvement- Reduced Government Involvement- Trade Agreements / Reduction in - Trade Agreements / Reduction in

Trade BarriersTrade Barriers


Environmental AwarenessEnvironmental Awareness Factors Affecting Price VolatilityFactors Affecting Price Volatility

- No constraints on acreage - No constraints on acreage adjustmentsadjustments

- Reduced government stocks- Reduced government stocks- Immediate response to market - Immediate response to market

signalssignals


Environmental AwarenessEnvironmental Awareness TrendsTrends

- Increasing farm size- Increasing farm size- Increased specialization - Increased specialization - Attribute-differentiated products- Attribute-differentiated products- Fashion or niche markets- Fashion or niche markets- Identity preserved products- Identity preserved products


Environmental AwarenessEnvironmental Awareness Trends Trends

- Partnership with suppliers & - Partnership with suppliers & purchasers purchasers - Proprietary information - Proprietary information & technology & technology

- Industrialization of farms- Industrialization of farms- Concentration- Concentration- Reduced political influence- Reduced political influence

Risk management strategies must fit your circumstances, the

current business environment, and must integrate production, marketing, financial, legal and

human risk.

Risk management strategies must fit your circumstances, the

current business environment, and must integrate production, marketing, financial, legal and

human risk.


Diversification to Manage RiskDiversification to Manage Risk

Objective: Maximize net return while Objective: Maximize net return while reducing income variabilityreducing income variability


Types of Diversification:Types of Diversification:

Additional EnterprisesAdditional Enterprises

Different Mix of EnterprisesDifferent Mix of Enterprises

Differentiated ProductDifferentiated Product


Types of Diversification:Types of Diversification:

Specific Attribute ProductSpecific Attribute Product

Value-Added ProductValue-Added Product

Non-Farm Income & InvestmentsNon-Farm Income & Investments


Diversification Issues:Diversification Issues:

Product Form &/or SpecificationsProduct Form &/or Specifications

Market Location & AvailabilityMarket Location & Availability

Yield VariabilityYield Variability

Price VariabilityPrice Variability

Price DiscoveryPrice Discovery

Managing Risk: Diversification and TechnologyManaging Risk: Diversification and Technology


Size/Scale Restricts/RequirementsSize/Scale Restricts/Requirements

Product Volume ConstraintsProduct Volume Constraints

Special Management SkillsSpecial Management Skills

Production Practices/TechnologyProduction Practices/Technology

Credit AvailabilityCredit Availability

Managing Risk: Diversification and TechnologyManaging Risk: Diversification and Technology


Counter to Need to Specialize as Counter to Need to Specialize as Technical Knowledge IncreasesTechnical Knowledge Increases

Comparative Advantage / DisadvantageComparative Advantage / Disadvantage

Competitive Advantage / DisadvantageCompetitive Advantage / Disadvantage

Net Return Variance and CovarianceNet Return Variance and Covariance


Technology’s Role In Managing RiskTechnology’s Role In Managing Risk

Objective: Improve management Objective: Improve management and production efficiencyand production efficiency

Compare benefits to costsCompare benefits to costs


Technology’s Role In Managing RiskTechnology’s Role In Managing Risk

Technology is more than high tech Technology is more than high tech and biotechand biotech


Technology BenefitsTechnology Benefits Cost ReducingCost Reducing Yield EnhancingYield Enhancing Quality EnhancingQuality Enhancing Price EnhancingPrice Enhancing Provides Market AccessProvides Market Access Provides Management InformationProvides Management Information


Technology NegativesTechnology Negatives Increased CostsIncreased Costs Increased RiskIncreased Risk Applicability Based On Size/ScaleApplicability Based On Size/ScaleConsumer Rejection/AcceptanceConsumer Rejection/AcceptanceEnvironmental RiskEnvironmental Risk


Transition PlanningTransition Planning FeasibilityFeasibility Startup CostsStartup Costs Additional Credit NeedsAdditional Credit Needs Cash Flow RequirementsCash Flow Requirements Financial Risk ConsequencesFinancial Risk Consequences


Transition Planning ToolsTransition Planning Tools Budgeting:Budgeting:

- enterprise, partial, whole-farm- enterprise, partial, whole-farm Accounting Software:Accounting Software:

- projected cash flow- projected cash flow FINPACK:FINPACK:

- comprehensive financial - comprehensive financial planning planning and analysis packageand analysis package


Measuring RiskMeasuring Risk Variance In Net ReturnsVariance In Net Returns Relative Importance of Positive and Relative Importance of Positive and

Negative VarianceNegative Variance Historical DataHistorical Data

- Does history repeat itself?- Does history repeat itself?


Relationship of Risk and ProfitRelationship of Risk and Profit

High Risk = High Potential ProfitHigh Risk = High Potential Profit

Low Risk = Low Potential ProfitLow Risk = Low Potential Profit

The objective of risk management is not to eliminate risk.

Risk management is taking the right risks to maximize profit

while reducing income variability and meeting financial obligations.

The objective of risk management is not to eliminate risk.

Risk management is taking the right risks to maximize profit

while reducing income variability and meeting financial obligations.

Documents

Pacific Northwest & Alaska Risk Management Education Regional Conference