Topic #3 Business Risk Management

[charliep]

Not much activity so I guess I will cut to the chase and go for the one that may cause controversy. As a view from some who is involved in this process in a small way at the provincial level, this is the one area that is causing the most controversy and is the fartherest away from agreement.

http://www.agr.gc.ca/cb/apf/risk_e.html

A quote from the website is

"We need a Canadian risk management approach for
21st century success

Governments working with industry can change the current approach to support the objectives of growth, diversification and increased value-added activity in Canadian agriculture. In particular, programs need a more businesslike approach to risk management-an approach that would focus on enhancing income from the farm through active encouragement of risk mitigation, adaptation and consideration of a farm's future potential.

Producers should be encouraged to take a more active role in managing the risks to their business. This includes not only assessing and mitigating all risks to income but also looking to capture new production and market opportunities. Producers who wish to diversify into new, potentially profitable crops would be able to do so with full confidence that they would have assistance in risk protection. When a producer chooses to use private risk management tools to help mitigate farm income risks, the new approach would recognize that initiative.

Governments, in concert with stakeholders, have much work to do to develop this new risk management approach. Key principles that could guide this development include:" (You can read from the website.

Thoughts?? Tie in between what is being said here and in the "Lyle in Washington" thread. You can help me hear but is there a disconect between what is being said about safety net programs and steps the government expects you to take as farm managers to manage risk in your business.

[bobn]

"When a producer chooses to use private risk management tools to help mitigate farm income risks, the new approach would recognize that initiative."

This comment I would take to mean that,
"I as a wheat grower would be free to plant and hedge all of my crop using the futures markets if I so choose, hereby being freed of the CWB noose".

I would expect though, that the real meaning is, "farmers will be expected to sink or swim when the time comes, no government money will be available for help. The CWB will be reformed to allow buybacks based on the futures markets but we must maintain the monopoly as is."

[ianben]

If we really could manage ALL the risks in farming we would be extinct already.
Two or three multi-nationals would be producing all the food.These polititians have been on too many management courses and are convinced all risks can be managed.
Dont seem to realize it is different every year on the farm one massive gamble.
Here in UK we have the very same topics from our polititians.
We are perhaps a little farther along the safty tracability line but environment and risk management will be our salvation!!!!!!

[TOM4CWB]

Charlie,

I see this "risk management" as an interesting subject!

Hindsite is always 20/20, but what about the future when we hedge?

The government is willing to take our income tax check, and not pay saftey net payments when we make "good" decisions, but in hindsite what are they going to do when we "hedge" at a "low" price and everyone else who didn't has 30% more income?

Risk and grain farming go together, and there cannot be a Agricultural economy without grain production!


I think it is particularily sad when the provincial government took the 20-25 million in interest revenue from our crop insurance reserve and put it into provincial general revenue (debt repayment) instead of lowering our premiums 30% like they did over the last 2 years!

It is OK for the Alberta gov. to lose $350-450 million on Nortel stocks, but to make a more efficient crop insurance program is a hard struggle!

Isn't this kind of hypocritical of the provincial government?

Pulling saftey nets apart seems the trendy thing to do, since there are so few farmers now, their votes don't count anyway!

By the way, when was the last famine in Canada?

Does the 97% of Canadians who don't farm ever consider that grocery shelves might be empty one day...

We farmers don't really matter, this seems to be the message, both provincially and federally, isn't it Charlie?

[charliep]

I'll leave the specific questions on crop insurance alone. The question is whether a modified crop insurance program is the way to go or some other whole farm program is a better route?

On your question about whether the federal or provincial governments care, what other industries recieve the level of policy attention or financial support that agriculture does? If I were to open up a resteraunt or hardware store, what social guarantees would I have to backstop my business?

[cakadu]

Past discussions have centered around whether or not farming is a business. Shouldn't we get some sort of consensus as to whether it actually is a business before we go try to put in risk management practices?

[TOM4CWB]

Charlie,

Obviously, the EU and US have more concerns about and for their farm communities, and their support $ actions prove this point.

If the Canadian dollar had not depreciated our farms would be in very bad shape; as it is we are dealing with the depreciated dollar and the effects this situation has, and the 25% loss effect the EU-US subsidies have had on our income.

Canada's US trade situation with softwood lumber, wheat, and Koyoto need to be rectified, yet the Canadian government has so far refused to bite the bullet...

Wether farming is a business, is kind of like health care and education, farming must be efficient for our economy to survive, yet the tools to create these "risk management" efficeincies seem to be less important than, yet are critical to, the stability of farming.

Risk management systems (including Saftey Net Programs) in Canada only help smooth out the fluctuations in income, but overall do not add a significant income flow to the farms's bottom line in the long term.

Hedging is really no different, a net income from risk management is very small, after all is said and done!

Yet it is critical for a large farm business to employ this tool as a large fluctuation in income can destroy it very quickly... much more so than the smaller farms of 25 years ago... the margins are much less now, it is even more crytical to stabilize income.

Efficiencys of scale are being reflected in consumer's grocery bills, Canadian's pay some of the lowest food costs in the world... in human history... a small amount of Saftey net stabilization help is crytical to maintain our farms, we hope the small amount we receive now will not become even smaller...

This brings us to the vision of government, a domestic G8 vision of value added, domestic marketing, and let the rest of the world starve...

Talk to poultry and pork producers who have had their industry ravaged by US steel tariffs... if there is no trade, their is no money to buy our food products in the rest of the world, and North American farmers quickly are destroyed!

Like it or not, we live on the planet earth, and have responsibilities to share our wealth and food with needy and less developed countries... and farmers alone cannot pay the whole price of this responsibitity themselves.

Sept 11 shows how exposed we are to these realities, and that the neighbour we are responsible for loving and sharing with may be 5,000-10,000 miles away...

[charliep]

Tom4cwb

To bring it back to Cakadu point, maybe where we need to start is looking at objectives. There are three groups of farmers out there - ones that are doing okay without government support, ones that are struggling but societal investment provides them an opportuntity to succeed (some will say we are handing them more rope to hang themselves but that discussion will occur) and a third category where no amount of investment will make them viable. In looking at safety net programs, how should these three groups be handled? Can you have the same program for a commercially viable farm versus one that is in survival mode? If government has limited funds, where should the investment be made?

Does a one size fits all safety net program work? My career has been around helping farm managers identify risk factors in their business (yield, price, financial, etc.) and actions they can take to minimize (crop insurance, hedging, solid balance sheet/diversification) etc. The next step is actions.

[TOM4CWB]

Charlie,

I believe many farmers are discouraged because the saftey net system was not designed to offset subsidy wars.

Yet in the mid 1990's farmers were promised that decreasing Canadian government support would be offset by declining subsidies in US-EU, allowing competition and market forces to determine where production would be economical and natural advantages determine production patterns.

However farmers were decieved, this has not happened.

Now farmers are obviously not trusting of government in general, and as with the Grain Growers of Canada Trade Injury proposal, the federal government has itself provided the documentation of our industries 25% loss in income over the past 5 years.

Yet the feds fail to even include this important issue in the framework, why?

Risk Management is a good stabilisation method, yet being stabilised below profitable levels is no help to anyone!

Creating more production risk than the pricing risk management tool fix, by hedging for instance, is not a net benefit to anyone.

Balance is always the most effective business strategy, by putting all ones eggs in one basket can create bankruptcy in short order.

Better crop insurance can help reduce these production risks therefore allowing a better overall risk management strategy for pricing and hedging.

Hindsite is 20/20 and anyone can say what should have been risk managed a year after the event!

But consistantly risk managing profitably requires the wisdom of Solomon, and the ability to seperate risk from greed from frustration, from need, from speculation, from hard determined work.

Obviously anyone can get lucky, when risk managing, yet few can deal effectively with risk and not lose their nerve or get tired and quit!

Theoretical risk management is much different than day to day decisions that can make or break a farm, if in combination, work to undermine the profitability, or sustain and enhance survivability, of a farm.

If this seems complicated, it is, and no wonder many have tried to risk manage price... ending up in more trouble than if they had done nothing!

What is the answer Charlie?

The pressure in farming today is to not make any mistakes, know everything, and forsee the future while being a human on planet earth!

Could be tuff to fill these shoes in the next generation, maybe Charlie?

[ianben]

Tom I agree with you on risk management hindsight is a wonderous thing. Subsidies are not the cause of your problems though.
I have tried to explain how we are hurting too. Real EU farmers that is. Real US farmers seem to be hurting too.
The idea that low prices/subsidies will force some of us to decrease production is the myth.
How much Canadian land is lying idle? Are you having more summer fallow? When a farmer quits does another farmer farm his land? I took on some land last year I expect to produce more than the previous guy an lower my costs overall.
Sound familiar bet that is what happens in Canada too.
Low prices/subsidies mean we all run faster in the treadmill and produce more.
Till we realise we are all farmers and together we could control price and supply no one can regulate or manage us.
Why should they when we run faster and faster and provide cheaper and cheaper food.
Are there any farmers in the world who do not want better prices????

[TOM4CWB]

ianben,

The economic principal of diminishing returns, that at a point more expences return less income than the input cost still is reality in agriculture, particularily grain farming.

The higher the farms capital cost, the more likely farmers will over spend on inputs like weed control and fertiliser.

This is a tread mill that does lead to higher production, and sometimes at an environmental cost as well.

Inputs are a form of risk management as well, if I spend $1 I can expect $2 back if I have a stable environment.

That subsidies get capitalised into overhead is a given in time, hence the EU/US problem you speak of.

This inflationary pressure then puts pressure on the next generation of farmers, with the tempation of cashing out the farm because economics cannot justify the farm business.

Yet as you have correctly stated in most countries the land does not lay idle, as should be the case.

What is the answer?

Are we gaining anything?

The general population has never been better fed, with safer, cheaper food than we have today, therefore civilisation in general has gained, and the standard of living for farmers in the G8 countries is better than ever before as well.

Is what we are doing sustainable, I believe this is the question?

[TOM4CWB]

Farming is a business! was there any doubt. Because you do it with your family makes it a life style.

Now business risk management is just a fancy catch phrase for being a good manager. Most anybody who has farmed for any length has been good at business risk management or had a Pappy who was a good manager.

The best and only thing that would improve are risk management would be a better crop insurance plan with higher coverage per acre. The Alberta government went along way in providing that in this year's coverage(up $50 to $100 per acre more coverage). Now we need a clause to protect against fraud(or farming the system to be polite). This could be accomplished by having farmers producing imput receipts. I believe this policy would actually allow our premiums for insurance to go down went fraud was removed as a cost of doing business. But we must be careful that we done take all the risk out of farming as it will open the door to public investor corportations to move into farming. Then it would be goodbye family farm.

I agree with ianben's comments on how the business of farming operates world wide. His statement of setting a price for our products is obtainable these days through the use of the commodities markets by farmers using Grain Pricing Orders. If more farmers would just use them to ask for .50 cents or $1.00 more per bushel than what the market is giving, we just might push the markets to a higher level. With this option a better income would not get capitalized into land or rental prices.

We have got to stop being price takers and start asking for a price.

Get those Grain Pricing Orders in today for new crop deliveries in Oct. 02.

The Kernel