Success in agriculture involves balancing your expected risks and rewards. Risk management in agriculture, or almost any other business, is most commonly executed through management practices – decisions and actions made by managers with the goal of balancing risk and reward, as explained in the following examples:
- If you operate a landscaping service, you might manage the risk of employee injury by requiring personal protective equipment, conducting regular safety training, and monitoring your equipment for proper function and safety features.
- If you own a clothing store, you might manage the risk of inventory loss by 1) taking a regular inventory, 2) employing loss prevention personnel, and 3) using electronic tags that can only be removed by employees when a customer makes a purchase.
- If you run a ranch, you will probably vaccinate your calves to reduce mortality due to various illnesses.
- If you run a greenhouse, you might install an automated irrigation system to minimize the risk of plant loss due to a lack of water.
In each of the above cases, the manager is choosing to spend resources (time and money) with some degree of confidence that the investment will generate a positive return; in other words, the benefits will exceed the costs.
Sometimes managers practice risk management by diversifying their operation. As an example, if you own an Iowa farm growing 1,000 acres of corn, how might you diversify? Well, next year, you might 1) plant 400 acres of corn, 2) plant 400 acres of soybeans, and 3) begin transitioning the remaining 200 acres to high-yield organic corn, with plans to market the crop to a specialty feeding operation.
As a final point, many successful farm and ranch managers work to be flexible in how they grow and market their crops. Production and market conditions change almost continuously – sometime your strategies should too.
The concepts of diversification and flexibility are pretty easy to understand – the chance of all of your crops and approaches failing together is much smaller than the chance of failure for just a single crop or approach. In short, don’t put all of your eggs in one basket.