Running a successful farm takes hard work and careful risk management. Farms face several unique risks that don’t affect other industries. However, assessing those risks follows the same process. While the degree of acceptable risk and the approach to handle it will differ from person to person, the framework for identifying risks remains unchanged.
Develop a Risk Heat Chart
A heat chart provides a simple visual tool to identify if a risk is significant enough and likely enough to address. The chart below is a simple illustration comparing the potential effect of a risk on the left and the likelihood of the risk occurring on the bottom. The darker the color, the more damage the risk can cause to the business.
To make a usable risk heat chart, farmers need to perform the following:
- Pinpoint things that can go wrong. This includes external and internal risks. This step is critical because many farmers overlook risks they think are unlikely, which can come back to haunt them later. Some external risks include fluctuating markets, law and regulations governing farming, and weather events. Internal risks can be a loss of employees due to failing health or quitting, damage to assets such as a barn fire, personal debt, and more.
- Estimate the potential effect. Once farmers identify risks that can affect their farm, they need to determine how much it can hurt their operation. Farmers will want to seek input from employees to gain a balanced view of the risks. Using the above heat chart, farmers can assign five categories ranging from negligible to severe for the potential effect the risk can exert on the farm.
- Estimate how likely the risk is. Similar to the above step, farmers need to look at their risks and determine how likely they are to happen. From there, they can assign them to one of five categories ranging from remote to probable.
Once farmers know their risks and decide how much they can affect the business and how likely they are to occur, they can plug them into the various slots on the heat chart. For example, if a farmer estimates that a drought it possible this year (category 3 risk) and the potential effect is severe (category 5), this creates a risk score of 15—one of the hottest risks on the heat chart. This tells the farmer he or she needs to develop a risk management strategy to protect their farming operation. All farms have risks they need to address, but they don’t need to do it alone. The experts at Cline Wood can help you identify all risks that could affect your farm as well as implement strategies to mitigate them. Contact us to learn more.
This document is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Marsh & McLennan Agency LLC shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting or legal matters are based solely on our experience as consultants and are not to be relied upon as actuarial, accounting, tax or legal advice, for which you should consult your own professional advisors. Any modeling analytics or projections are subject to inherent uncertainty and the analysis could be materially affective if any underlying assumptions, conditions, information or factors are inaccurate or incomplete or should change.agribusiness risk, farm risk analysis, farm risk management, farming risk