By: Alexandria Smith, WVU Extension Agent, Hampshire and Hardy counties
Farming is a risky business. We hear it over and over again when talking to our peers about our plans to farm.
And, when making a decision on whether to farm or not to farm, there are five big risks to consider: financial risk; production risk; marketing risk; legal and environmental risk; and human resources management risk. Let’s talk about financial risk.
Financial risk means assessing whether or not you have sufficient cash to meet expected obligations, generating lower than expected profits and losing equity in the farm. In addition, financial risks may be caused by increased input costs, higher interest rates, excessive borrowing, higher cash demand for family needs, lack of adequate cash or credit reserves and unfavorable changes in exchange rates.
According to the New England Vegetable Management Guide, here are some good strategies to manage financial risks:
- Develop a strategic business plan.
- Monitor financial ratios and enterprise benchmarks.
- Control key farm expenses (consider other suppliers and alternative inputs).
- Conduct a trend analysis to assess change in farm profits and owner’s equity over time.
- Purchase Whole-Farm Revenue Protection to provide a safety net in poor earning years.
- Communicate and renegotiate agreements with suppliers and loan terms with lenders.
- Consider leasing and rental options rather than purchasing machinery, equipment or land.
- Evaluate the possibility of expanding or contracting different enterprises.
- Control or defer unnecessary family and household expenditures.
- Find off-farm employment for a family member, preferably a job with benefits such health insurance, group life insurance and a retirement program.
- Use non-farm investments such as IRAs or mutual funds to diversify your asset portfolio.
We’ll talk more about the risky business of farming in our next newsletter. For additional information, contact firstname.lastname@example.org.