Introduction to Risk Management for Floriculture Businesses

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Introduction to Risk Management for Floriculture
Businesses
February 1, 2000 Bedding Plants School
Wen-fei Uva Senior Extension Associate Department
of Agricultural, Resource, and Managerial
Economics Cornell University Modified by Georgia
Agriculture Education Curriculum Office June, 2002
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What are Risks?

• Dictionary Definition
• Possibility of Loss or Injury
• For Agricultural Businesses
• Variable Yields
• Product Price Uncertainty
• Variable Input Costs
• Results in Profit Uncertainty or Loss

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Increasing Importance of Risks in Horticulture

• Inherent Risks from the Biological Process
• Trends of Consolidation and Industrialization
• Larger Farms, Higher Productivity
• Production Specialization
• Larger Retailers, Higher Buying Power
• Globalization of Markets
• Little (or No) Government Intervention/Support in
  Floriculture Commodity Markets
• Increased Government Regulations
• Changing Technologies and Consumer Preferences

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New York Floriculture and Environmental
Horticulture Production - By Crop Category
Source Floriculture and Environmental
Horticulture, USDA
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U. S. Per Capita Expenditure on Floriculture
Products
Source Floriculture and Environmental
Horticulture, USDA
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Three Principles of Risk Management

• Risk Aversion
• Most People Prefer Certainty to Risk
• Will Accept Lower Incomes for Lower Risks
• Avoid Changes for Fear of Losses
• Diversification
• Combinations Have Lower Risk Than a Single
  Alternative - Portfolios
• Return-Risk Tradeoffs
• Insurance - Pay to Lower Risks
• Purchase Insurance - Pooled Risks across
  Individuals
• Self-Insurance - Install Irrigation

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Five Sources of Risks in Agriculture

• Production - Weather, Pests, Input Quality and
  Availability, Technological Changes
• Marketing - Price Risks, Market Availability and
  Dynamics
• Finance - Price Risks and Unstable Cash Inflow.
• Legal/Environmental - Multi-dimensions related to
  other risks
• Human Resources - Related to Farm Owners, Their
  Families, Management, and Employees.

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Responses to Production Risks

• Diversification
• Product Diversification crops, varieties, stages
• Geographical Dispersion
• Adopt New Technology and Practices
• Environmental control
• Irrigation and Fertilization
• IPM
• Input control (supply, soil testing, labor..)
• Management Information
• records, monitoring
• Crop Insurance

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Responses to Marketing Risks

• Diversification products and/or markets
• Vertical Coordination and Marketing Contracts
• Marketing Alliances and Cooperatives
• Direct Sales to Consumers
• Opportunities in the urban areas
• Many alternatives
• Required marketing skills and devote considerable
  resources to marketing
• Maintain high quality
• Volume is usually low
• Management Information

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Develop A Strategic Marketing Plan
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Responses to Financial Risks

• Five Dimensions
• Interest Rate Risk - Cost of debt
• Liquidity - The ability to pay you cash
  obligation
• Response Good financial records and analysis of
  key ratios and projections
• Solvency - Protect the business equity at
  adequate level
• Response Keep up-to-date financial records and
  carefully plan expansion
• Family Consumption Expenditure
• Off-Farm Employment and Investment
• Income diversification for the farm families

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Responses to Legal and Environmental Risks

• Legal Issues
• Affected by Other Sources of Risk
• Financial
• Human Resources
• Environmental Regulations
• Tort Liability
• Negligent or intentional injury to property or
  people in the course of farm business. - Civil
  Law Suits
• Intellectual Property/Proprietary Rights
• Response
• Insurance Business Liability Insurance,
  Auto-Insurance
• Provide Training
• Employment Agreements Nondisclosure, Non-compete

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Responses to Legal and Environmental Risks

• Environmental Risks - costs arise from
  environmental regulation and/or damages
• The trend towards environmental controls is
  unlikely to reverse
• Civil or criminal penalties
• Responses
• Soil and water tests
• Pest scouting
• Proper farm chemical use, storage, and disposal
• Training

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Responses to Human Resource Risks

• Sources of Risks
• Increased Management Complexity
• Due to increasing size, capital, and management
  requirements.
• Multiple generation and unrelated owners
• Managerial limitations manifested in production
  risks
• Loss of Owner Causes Financial and Management
  Risks
• Voluntary
• Involuntary 2Ds 2Is

Death, Divorce, Illness, Injury
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Responses to Human Resource Risks

• Responses
• Business and Estate Planning
• Health, Disability, and Life Insurance
• Enhance Managerial Resources of Owners and
  Employee-Managers
• Increase Range of Specialties
• Modern Personnel Management/Development Practices
• Different Management Practices for Seasonal
  Workers

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Conclusions

• Recognize the Increasing Management and
  Technology Complexity
• Identify the Key Risks
• Determine the Risk-Return Trade-offs
• Trade-Offs Among Risk Responses
• Estimate Costs of Risk Responses
• Time and Monetary
• Seek Assistance Take Charge

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