MichiganAgRisk.com - Strategic Risk Management

Michigan Ag Risk - Strategic Risk Management

Agricultural Production Strategic Risk Management

For an individual farmer, risk management involves finding the preferred combination of activities with uncertain outcomes and varying levels of expected return. One might say that risk management involves choosing among alternatives for reducing the effects of risk on a farm, and in so doing, affecting the farm's welfare position. Some risk management strategies (such as diversification) reduce risk within the farm's operation, others (such as production contracting) transfer risk outside the farm, and still others (such as maintaining liquid assets) build the farm's capacity to bear risk. Risk management typically requires the evaluation of tradeoffs between changes in risk, expected returns, entrepreneurial freedom, and other variables. (Penn State College of Agricultural Sciences, Agricultural Marketing Website. [1])

With an understanding of basic risk and risk management principles, agricultural managers have a foundation for learning and implementing strategic risk management practices. As a first step, managers should learn about available risk management strategies and tools. Next, managers must become skilled in choosing and employing these strategies and tools according to the specific needs of their organizations. Effective managers understand the interaction of the various strategies employed within the five risk categories. The final step in the process is to implement and then adjust risk management strategies to fit the organization’s day-to-day, week-to-week, and year-to-year needs.

Three articles are presented on the following pages:

From the University of Arkansas extension service, we provide an article by Ronald Rainey entitled Risk Management: Overview of CORE Analysis .
From Kansas State University extension service, we provide an article by Michael R. Langemeier entitled Financial Ratios Used in Financial Management .
From Alabama A&M and Auburn Universities, we provide an article by Bob Goodman entitled Environmental Partial Budgeting: A Framework For Decision Making .

These articles were selected for their relevance, ease of understanding, and completeness; however, they do not provide an exhaustive discussion of livestock risk management strategies. Readers desiring additional information about livestock risk management strategies are encouraged to explore the reference links provided below.

[1] http://agmarketing.extension.psu.edu/Commodity/WhatRisk.html.

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