Uncertain times call for a solid risk management plan
COVID-19 and market turmoil have magnified the importance of developing risk management strategies.
“Farmers can take various steps to protect their businesses from risk. Risks can include fluctuations in currency, interest rates, global markets, a sick workforce, business continuity, business commodity prices, maintaining mental health and production costs,” says Denise Filipchuck, Farm Management Consultant and CEO of Filipchuck Management.
Insurance and government programs are great ways to reduce the financial and market risk, says Filipchuck.
“Crop insurance, hail insurance, revenue insurance, production cost insurance, AgriInvest and AgriStability are all options available to help you manage the risk of crop failure, rising costs, reduced commodity prices, marketing issues and other financial shortfalls.”
Know your working capital and cash flow
At the start of this new production season, Filipchuck recommends having at least 50% of the projected operating expenses covered by the farm’s working capital.
“Having a strong working capital position allows greater flexibility with commodity marketing, improves the ability to meet cash flow commitments on time and reduces interest costs and risk.”
Also, know the farm’s monthly cash flow, living expenses, as well as the cost of production. The latter affords farmers the ability to identify opportunities to make appropriate changes, reduce costs and improve profit margins, Filipchuck says.
And when forming a marketing plan, reduce the risk of making emotional decisions by basing market choices on acceptable, favourable and survivable price targets, designing decisions to meet cash flow needs, she says.
“Use your monthly cash flow and the cost of production calculations to design a marketing plan that is specific to your timing commitments and profitability goals,” Filipchuck says.
Review your credit situation
Reduced risk and improvements in profitability, financial health and creditor relations also come from paying close attention to your credit portfolio.
Risk management plans can help you navigate your business with confidence and peace of mind.
“Use the right revolving credit options for maximum flexibility and minimum cost, while being mindful of the term debt portfolio details, future debt service relief, and leverage positions,” Filipchuck says.
She also stresses the need to build relationships with lenders through clear and consistent communication.
“If you expect a change in your financial situation, due to things like poor crops, delayed harvest and delivery or a change in your seeded acres, talk to your primary creditors about it early. They can help you set up the best credit solution for your situation,” Filipchuck says.
Whether it’s a plan for if the farm workforce gets sick, to maintain business continuity or, if commodity prices fluctuate, risk management strategies will “help you navigate your business with confidence and peace of mind while reducing stress for you and your family,” Filipchuck says.
COVID-19 adds to the risks that can impact farm profitability, from fluctuations in global markets to a sick workforce and maintaining personal mental health. Having a plan in place can bring peace of mind to reduce stress. Investigate insurance and government programs, know the farm’s cash flow and maintain relationships with lenders.
Article by: Richard Kamchen