Managing Risk in Large Scale Farming
For farmers to get a good return on their investment, a risk management plan is essential. Learn about large-scale farming risks, their impact, and management.
As you plan to manage your Iowa farm and stabilize the farm’s income, there are several risks to consider and mitigate. Large-scale farming risks can result from financial, marketing, human resource, legal, or production sources.
There is volatility in agriculture driven by multiple factors such as climate change, price volatility, changes in energy prices, and shifts in demand and supply, among many other factors.
Farmers are responsible for managing the risks to achieve collective food security and for their operations to protect their investments against fluctuations in income. Here are some common risks large-scale farmers and farm managers should look out for and address.
1. Marketing and Price Risk
Price risk is one of the most critical large-scale farming risks to producers. Often, farmers risk losing market for their agricultural products or experiencing unexpected price changes. Farmers can lose market when a processor or buyers close operations or relocate.
When farmers lose markets, agricultural produce goes to waste and may be forced to sell directly to small farmers, which is expensive and requires time.
Increased competition due to an increased number of growers, and marketing risk, can be caused by increased competition, resulting in low sales. Marketing and price risks cause direct economic challenges to farmers, and to avoid them, they should prepare for the challenges.
Large-scale farmers should set realistic price targets and sales forecasts to manage the risks. Increased vigilance in marketing can help farmers lock in higher prices. Joining cooperatives can also help large-scale farmers protect their operations from risks as they provide guaranteed markets and reasonable prices.
Sales and price contracts can protect farmers from significant price shifts which can affect their earnings. It is recommended that they consider futures contracts to lock in their investments by hedging them against the risk of price fluctuations.
The contracts assure farmers that they will sell their produce at a specific price even before the harvest. The agreements also guarantee product delivery at a particular time, eliminating the risk of loss of market.
Proper scheduling of harvest and sales across the season can also go a long way in reducing risk. Market research beforehand can help the farmers avoid planting crops with no market as it helps them understand the preference and needs of their target market.
2. Legal Risks
Often, most large-scale farmers don’t think much about the potential legal risks of their operations. They face many threats, including adhering to contracts where if they fail to, there is liability attached. The state and federal laws impose duties on farmers, and they have to honor them, failure to which can hurt their operations.
In case they break environmental laws, liability will also apply. Depending on the circumstances, such as accidents and injuries, persons on the farm, customers, and even employees can sue. There is also liability concerned with environmental concerns such as pesticides, water pollution, and soil erosion.
Large-scale farmers can avoid legal risks by understanding their state laws and consulting a relevant attorney to get answers to legal questions. Reviewing insurance policies and getting adequate liability coverage can help. Getting liability insurance enables you to transfer risk at a fee.
Review the liabilities attached to different legal structures with the help of your attorney and select one that will protect you against legal risk. To avoid legal risks that come with failure to honor contracts and agreements, make sure you understand the fine print and seek legal support.
A good relationship with the farmland community will help prevent avoidable issues. Build a positive relationship with neighbors and understand their concerns, and along the way, you will get information on legal risks you were probably not aware of.
Using sustainable agricultural practices can help you avoid environmental risks and liabilities. Before starting operations, make sure you understand the regulations surrounding farming operations.
3. Production Risks
Production risk occurs from the uncertainties surrounding crop growth processes and livestock management. The sources of the risks include climate, weather, pests, and diseases, among other factors that affect the quality and quantity of crops produced.
There is a risk that the output will not match the forecasts in large-scale farming operations. This results in damage to crops and economic loss.
While most of the sources of production risk, such as adverse weather conditions, are usually beyond the farmers’ control, there is still something to be done to minimize it. Farmers can employ various strategies, such as adopting risk management farming practices.
Irrigation is a good example and comes in handy when there is drought by providing crops with the moisture they need to grow. Tile drainage is also common in farmlands prone to flooding to remove excess sub-surface water.
Crop insurance against unforeseen adverse weather conditions like drought and floods. Growing diverse crop varieties of changing crops and planting ones that will thrive in specific seasons will go a long way in maintaining the quality and quantity of produce and give a good return on investment.
If you have entered into a futures contract to ensure the production meets your commitment, you can embrace intensive growing by increasing acreage to guarantee adequate produce.
Production risk can be prevented even before you start your operations. That is by selecting less prone land to pests, frosts, and even flooding. Understanding the water drainage, soil fertility, and access to water for irrigation are essential factors to consider when choosing farmland.
Keeping your equipment in good working condition will mitigate farming risk by ensuring they operate efficiently for maximum production. Invest in regular maintenance to avoid disruption of farming operations that would interfere with the quality and quantity of produce.
Managing Risk for Effective Farming
All businesses, including farming, have associated risks. To better manage the risk to stabilize your operations, you must identify the risks you could face. Common risks of large-scale agriculture include price, legal and production risks.
Cotton Grave farm management experts can help you understand the large-scale farming risks you face and their potential impacts on your operations. Contact us to learn more about how you can mitigate the risks and lessen their impact on your income.
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