Risk management requires a plan

Developing a risk management plan offers a number of benefits.

First, it enables business owners and leaders to quantify risk and prioritise where their risk management efforts should be focused. Obviously there is a wide range of possible risk factors for any business. This process identifies those with the highest probability and develops proactive solutions to mitigate them.

Second, quantifying the risk puts boundaries around likely impacts. Risks that have not been evaluated and potentially solved offer fertile ground for anxiety and worry. At the least a risk management plan indicates the level of energy any potential problem deserves.

Third, the process increases the confidence of financiers and other key stakeholders in the business. A structured approach to managing exposure to otherwise unforeseen events will almost certainly enhance creditworthiness.

Obvious risks for an agribusiness strategy will include the traditional challenges of climate and markets. There is an increasing need to think about internal risks such as loss or unavailability of key personnel (especially the business owners) and implications for succession. External risks such as biosecurity, extreme climatic events and changes in product or financial markets all need to be considered.

The forecast El Niño weather pattern is a prime example. This could slash pasture growth and consequent farm productivity. Offsetting this is a recovering dairy price driven by markets anticipating lower national and international production and rebalancing of supply and demand.

A risk management strategy on this should quantify the likely impact on output, how this can be mitigated by securing feed purchase contracts and assessing the likely change in milk prices that could result.

A top farming operation will have records that show the impact of similar events in the past. Up-to-date information on fertiliser, cropping and feed purchase options will highlight potential for farm policies to plug the gap. This information can be used to model scenarios that quantify the impact and identify response strategies for management of working capital, discretionary cost reduction and adjustments to policies, etc.

When done with time on your side there is a longer lead time to react. This will contribute to more prudent purchase of farm inputs and avoids the negatives of having to compete with others who are slow to recognise its impact on their business.

Another strand of risk management is evaluation of options for diversification to spread investments and achieve exposure to different markets. Options include enterprises that offer alternative land uses as well as business growth outside farming by evaluating property, equities or trading investments that reduce reliance on the owners' day-to-day input.

The final component of effective risk management is to ensure insurance strategies deliver robust protection and respond to priorities. This has been highlighted by the recent Christchurch earthquakes. Many hit by those found their covers were inadequate or had not focused on the most important risk factors in their business. A lot has been learnt about managing claims and the capacity or willingness of insurance companies to meet expectations. Getting the balance right between external insurance and self-insurance will help strengthen decisions on what has become a big ticket overhead cost for all businesses.

Achieving top 10% performance has always demanded good timing. Being ahead of the game by proactive risk management and communicating strategies with stakeholders -- especially financiers – increases confidence and puts extra reinforcing in the foundation of quality farming operations.

• Kerry Ryan is a Tauranga agribusiness consultant.