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FARM & RANCH: Risk Isn’t a Dirty Word

Jonathan Newkirk says risk is a four-letter word, but it’s not a dirty one.

Newkirk, WSU Cooperative Extension area economist, says many producers treat risk as if it is a dirty word, and that’s understandable. Farming always has been a high-risk business, and it’s getting riskier. Changing weather patterns, globalization of markets and several legislative initiatives, have greatly changed risks.

With wheat prices the lowest they’ve been since the 1960’s its especially important for farmers to know where they are financially and have a risk management plan for the future. Farmers who survive today’s risk-fraught economic climate to farm another year, and another and another, are those who manage risk well.

Newkirk tells farmers to treat risk as an opportunity. Increased risks in today’s economic environment not only increase the chance that farmers may lose money, they provide opportunities for farmers to increase profits.

Many people avoid risk because it adds stress, and risk management involves time, effort and money, Newkirk says. He warns that the new, higher-risk economy makes it dangerous for producers to try to conduct business “as usual.” Failure to prepare adds to risks and will make it more difficult for producers to cope with 21st century farming.

And that’s where the Pacific Northwest Risk Management Education Project comes in. This three state effort involves a broad coalition of the three land-grant universities and many other public and private organizations which united to help cereal grain growers improve or develop risk management skills. Although the primary focus is on cereal grain, much of the curriculum also is applicable to producers of other commodities.

Newkirk, project leader, says three interrelated areas of risk are combined under the heading of risk management. They are financial risk, market (or price) risk and production risk.

During the winter of 1998-99, risk management workshops were held in each of the three states to provide useful materials and concepts to wheat producers. Through private and public partnerships the project developed a self-study curriculum, which is now available on the Web at http://pnw-ag.wsu.edu/risk/.

Curriculum on the risk management Web site outlines the elements of risk management and says economic returns from effective risk management should increase in the future. Tools on the Web site help producers:

  • Analyze their farm’s risk bearing capacity
  • Identify and prioritize sources of risk
  • Learn to use risk-management tools and strategies
  • Select and implement a risk management plan.

One of the teaching tools is a model 1,500-acre dryland grain operation. Data for spreadsheets and analysis tools are provided for producers to learn the principles of risk management.

Once producers learn to assess their risk – and this must be done on an operation by operation basis – they have to learn how to manage those risks. There are chapters on managing both production risks and financial risks.

The chapter on financial risks includes managing credit and liquid reserves, interest rate plans, structuring debt repayment and lease terms and risks. Analysis of investment in grain storage facilities also is treated.

The chapter on computerized decision aids provides five software applications to help producers with various aspects of record keeping and analysis, including market analysis. Yet another chapter provides downloadable software to create tables and charts.

The project is advised by a coordinating committee, which includes representatives from:

  • Country Hedging Inc.
  • Columbia River Bank
  • Farm Credit Services
  • Idaho Grain Producers Association
  • Intertribal Agriculture Council
  • NCIS Regional Insurance Companies
  • NW Farm Management Instructors
  • University of Idaho Cooperative Extension System
  • Oregon State University Extension Service
  • Oregon Wheat Growers League
  • USDA Risk Management Agency, Spokane Regional Office
  • Washington Association of Wheat Growers
  • Washington State University Cooperative Extension.

When harvest is over and fall crops are in the ground, farmers might find it very profitable to cozy up to their computer, go on-line and visit the risk management Web site.

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