Management insights: How other industries handle risk

Management insights: How other industries handle risk

Nonfarm companies look at risk through a wider lens; shouldn't you?

Most industries survive because they are forward-looking. Many giant food companies, for example, routinely look ahead to how new and emerging technologies, or new government policies might affect their bottom line. Energy companies worry about managing risks, like the volatility of coal prices or commodities.

Businesses are becoming increasingly data-driven in their approach to risk management — and that puts them ahead of the competition. How about your business?

Sure, farmers manage risk on an almost minute-by-minute basis. They must frequently confront issues such as weather, and an assortment of financial and operational risks.

Agricultural experts say producers can be much more successful by looking at risk management through a much wider lens.

But agricultural experts say producers can be much more successful by looking at risk management through a much wider lens, at a wider array of risks — just like companies in energy, food and beverage, and airline industries. Some of these risks include relationships with buyers and dealers, shifts in government policy and the law, international trade relationships, and new and emerging technologies.

Successfully managing and anticipating these risks will result in better business outcomes for farmers, they say.

“Most farmers think first of price risk and then yield risk,” says Raymond Massey, University of Missouri Extension ag economist. “They are frequently not talking about policy risk, technology, legal and human resource risks. The reality is, if a farmer has five employees and one doesn’t come to work that day, your workforce is down 20%. I try to encourage them to look at how can you have all of the folks working in your hog barn cross-trained in case one gets sick and doesn’t come in.”

Adds Michael Boehlje, a distinguished professor of agricultural economics at Purdue: “Farmers don’t think other companies have the kind of risks they do. I tell them, ‘Ever thought about trying to run a resort?’ ” He adds that weather often presents a huge risk for those kinds of businesses. “Then there is another set of risks that farmers don’t have on the radar screen: strategic risks. Some other industries are better at thinking about this than farmers.”

Learn from others

Here are a few risk management strategies farmers can learn from other industries:

Be innovative. Russell Walker, a clinical associate professor of managerial economics and decision sciences at the Kellogg School of Management at Northwestern University, says innovation can be a great tool for managing risk. In the manufacturing sector, he says, many companies thrive by producing distinctive products that set them apart from their competitors. Software companies thrive because of innovation.

Similarly, farmers could set themselves apart by introducing new products, he says.

“In the space of farming, there are opportunities for creating GMO-free, organic products,” he says. “That premium becomes a differentiator and allows you to create a higher price.”

Think long term. Massey says he encourages farmers to look beyond a single year when planning. Risk management should take into account what could happen in three or four years or longer.

“Food industries look at new technologies and new policies from the government that might affect them and try to get ahead of those things,” he says. “I see a lot of people talking about alternative methods of production — cage-free chickens, non-GMO corn.”

While a farmer may not have any trouble producing in a five- to 10-year span, it’s not a bad idea to try and anticipate the inevitability of change and consider investing some effort in trying to do things differently.

“You could devote a certain amount of time to learning how to grow your crop in a different manner, like non-GMO, in case [that market] takes off. This way you can be ahead of the curve.”

Put data to work for you. Like the rest of the business world, the agriculture industry is becoming significantly more data-driven, says Walker.

RELATED: Learn more at our upcoming Ag Data Conference, to be held Nov. 29-30 at the Coralville Marriott Hotel & Convention Center near Iowa City, Iowa.

“You now have a lot more information available,” he says. “Companies and corporations that deploy data-driven techniques and that provide the kind of solutions that reduce risk will be on the winning path. Some people don’t trust [data] or believe experience or intuition is superior, but if you start putting sensors on all equipment, that is going to put you on the winning side.”

Measure your appetite for risk. Boehlje notes that many nonfarm businesses have a chief risk officer who helps think about how best to put systems in place to minimize or mitigate risk. Such risk assessments sometimes force some nonfarm businesses to outsource. Farmers need to think more about building such systems within their own organizations.

“Some farmers have historically hauled their own grain,” he says. “I have a farmer friend who said he used to haul his own grain, but the driver was not being as careful as he needed to be. If you have an accident, the liability is huge. So he outsourced it.”

Oguntoyinbo writes from Columbia, Mo.

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