Pacific Northwest

1

• Pacific Northwest Alaska Risk Management
  Education Regional Conference
• March 24-25 Spokane, Washington

2
Managing Risk Through Diversification
TechnologyPaul PattersonAgricultural
EconomistUniversity of Idaho CES
3
Managing Risk Diversification Technology

• Risk
• The probability of an adverse effect
• The possibility that an outcome or event will not
  meet expectations

4
Managing Risk Diversification Technology

• Step One
• Know your financial situation
• Analyze and understand recent trends in your
  financial situation

5
Managing Risk Diversification Technology

• Step Two
• Awareness of Factors Affecting Supply
  Demand - Current Situation - Recent Changes -
  Long Term Trends

6
Managing Risk Diversification Technology

• Environmental Awareness
• 1996 FAIR Act - Eliminates Supply
  Management (Acreage Reduction Program) -
  Eliminates Income Stabilization (Deficiency
  Payments) - Phases Out Income Support (Market
  Transition Payments)

7
Managing Risk Diversification Technology

• Environmental Awareness
• Global Issues- Tightening World Grain Stocks-
  Reduced Government Involvement- Trade Agreements
  / Reduction in Trade Barriers

8
Managing Risk Diversification Technology

• Environmental Awareness
• Factors Affecting Price Volatility - No
  constraints on acreage adjustments - Reduced
  government stocks - Immediate response to market
  signals

9
Managing Risk Diversification Technology

• Environmental Awareness
• Trends - Increasing farm size - Increased
  specialization - Attribute-differentiated
  products - Fashion or niche markets - Identity
  preserved products

10
Managing Risk Diversification Technology

• Environmental Awareness
• Trends - Partnership with suppliers
  purchasers - Proprietary information
  technology - Industrialization of farms -
  Concentration - Reduced political influence

11
Risk management strategies must fit your
circumstances, the current business environment,
and must integrate production, marketing,
financial, legal and human risk.
12
Managing Risk Diversification Technology

• Diversification to Manage Risk
• Objective Maximize net return while reducing
  income variability

13
Managing Risk Diversification Technology

• Types of Diversification
• Additional Enterprises
• Different Mix of Enterprises
• Differentiated Product

14
Managing Risk Diversification Technology

• Types of Diversification
• Specific Attribute Product
• Value-Added Product
• Non-Farm Income Investments

15
Managing Risk Diversification Technology

• Diversification Issues
• Product Form /or Specifications
• Market Location Availability
• Yield Variability
• Price Variability
• Price Discovery

16
Managing Risk Diversification and Technology

• Diversification Issues
• Size/Scale Restricts/Requirements
• Product Volume Constraints
• Special Management Skills
• Production Practices/Technology
• Credit Availability

17
Managing Risk Diversification and Technology

• Diversification Issues
• Counter to Need to Specialize as Technical
  Knowledge Increases
• Comparative Advantage / Disadvantage
• Competitive Advantage / Disadvantage
• Net Return Variance and Covariance

18
Managing Risk Diversification Technology

• Technologys Role In Managing Risk
• Objective Improve management and production
  efficiency
• Compare benefits to costs

19
Managing Risk Diversification Technology

• Technologys Role In Managing Risk
• Technology is more than high tech and biotech

20
Managing Risk Diversification Technology

• Technology Benefits
• Cost Reducing
• Yield Enhancing
• Quality Enhancing
• Price Enhancing
• Provides Market Access
• Provides Management Information

21
Managing Risk Diversification Technology

• Technology Negatives
• Increased Costs
• Increased Risk
• Applicability Based On Size/Scale
• Consumer Rejection/Acceptance
• Environmental Risk

22
Managing Risk Diversification Technology

• Transition Planning
• Feasibility
• Startup Costs
• Additional Credit Needs
• Cash Flow Requirements
• Financial Risk Consequences

23
Managing Risk Diversification Technology

• Transition Planning Tools
• Budgeting - enterprise, partial, whole-farm
• Accounting Software - projected cash flow
• FINPACK - comprehensive financial planning
  and analysis package

24
Managing Risk Diversification Technology

• Measuring Risk
• Variance In Net Returns
• Relative Importance of Positive and Negative
  Variance
• Historical Data - Does history repeat itself?

25
Managing Risk Diversification Technology

• Relationship of Risk and Profit
• High Risk High Potential Profit
• Low Risk Low Potential Profit

26
The objective of risk management is not to
eliminate risk. Risk management is taking the
right risks to maximize profit while reducing
income variability and meeting financial
obligations.