Agriculture is not for the faint of business heart. If ever there was a job that should come with the warning “avoid if allergic to risk” in bright red letters, it’s farming with its cantankerous and cumbersome risk factors like weather, trade agreements and regulations.
Risk has been part of human lives since we crawled out of the ocean, scurrying away from predators. Our basic physiological responses (e.g. fight or flight) were born of the desire to avoid risky situations in order to stay alive another day.
Modern humans, though, have a funny relationship with risk. Many of us believe we might win this week’s lotto jackpot, yet we look askance when cautioned about a risky investment.
Every business faces risks that can present very real threats to its success.
Learning to identify, analyze, monitor and control these risks will help you achieve your business objectives.
In parts one and two of this series, we looked at the process of business planning and growth strategies. Planning and strategizing are two ongoing and critical business activities, but ones that inherently include risk. In this column we’ll look at how you can develop a risk management strategy as you scale up your operation.
Types of risk
Farm Management Canada drills into risk with a comprehensive list of six “families” of risk — people, finance, markets, management, business environment and production — under which fall 19 risk categories.
Learning about the different types of risk will help you formulate a risk management game plan. Like reading through the latest seed traits guide or bull proofs, once you know what’s out there, you can prepare and make informed decisions based on your unique business environment.
Business theory identifies four categories of risk:
- Strategic: Risks associated with operating in a certain industry; for example, purchasing land or quota to grow your business.
- Compliance: Risks associated with having to comply with laws and regulations; for example, environmental plans. These types of risk can add to your overhead costs or force changes in the way you currently work.
- Financial: Risks associated with the financial structure and systems of your business. To identify these risks, you’ll need to examine your daily financial operations, like cash flow (which we’ll cover in the next column).
- Operational: Risks associated with operational and administrative procedures, such as burdensome approvals or red tape.
Other risks include environmental (potentially a big one as climate change continues to affect growing seasons and quality and quantity of crops), political and economic instability at home or in export markets, and health and safety risks.
We tend to treat risk planning the same as we do wills. We’ll either “get to it someday” or ignore it altogether. After all, if we ignore it, it isn’t there, and if it isn’t there, nothing can happen, right?
In the 2012 Harvard Business Review article “Managing Risks: A New Framework,” authors Robert S. Kaplan and Anette Mikes note that “extensive behavioural and organizational research has shown that individuals have strong cognitive biases that discourage them from thinking about and discussing risk until it’s too late.”
It sounds complicated, but basically it means that we’re wired to NOT think about the awful things that might happen tomorrow, and instead put our energy into the positive things we can do today.
According to Kaplan and Mikes’s research, there is a list of six cognitive biases that we should recognize, because they can be having a harmful effect on our ability to assess and mitigate the risks for our farm.
As you read the list, ask yourself, how many of these are you prone to? The answer, probably, is all of them.
- We generally are “overconfident about the accuracy of our forecasts and risk assessments and far too narrow in our assessment of the range of outcomes that may occur.”
- We also “anchor our estimates to readily available evidence despite the known danger of making linear extrapolations from recent history to a highly uncertain and variable future.”
- Our confirmation bias makes it even worse, driving us to believe anything we hear that supports our thinking, and to dismiss anything that goes against it.
- We are also too quick to throw good money after bad, escalating commitment and irrationally directing even more resources to our failed course of action.
- We fall prey to groupthink. The social aspect of our human nature also makes us susceptible to the pitfalls of groupthink: “Once a course of action has gathered support within a group, those not yet on board tend to suppress their objections — however valid — and fall in line.”
- Many businesses give risk a chance to grow. They turn a blind eye to what seem like minor failures, and they treat early warning signals as false alarms.
As with any cognitive bias, just being aware of these behaviours plays a large part in overcoming them. To help you formulate a better line of attack, each time you discover or assess a potential risk, challenge yourself to make a list with concrete examples of when these behaviours may have influenced your own decisions about risk.
How to deal with risk
Risk management is all about identifying what could go wrong, evaluating the likelihood of that happening, and implementing strategies to deal with those “what ifs.”
AgriShield is a new online platform available to farmers (and advisors) that walks producers through the process of assessing, prioritizing and developing a plan to mitigate their risks. The platform is available at www.myagrishield.com.
In business circles, there are four ways you can deal with risk: accept it, transfer it, reduce it or eliminate it.
Your risk management plan will outline the tools and processes for the risks you’ve identified and the way in which you want to deal with them.
Seth Godin, one of the best-known marketing experts in the world, didn’t reach his professional pinnacle by not knowing a thing or two about risk. He said, “Resilient systems are far more effective and efficient. It’s easier to paddle a canoe on a calm lake, and the interactions and stability that come from predictable systems more than pay for the extraordinary effort needed to build and maintain them.”
How can you build a resilient and predictable system? Mathieu Lipari, program manager at Farm Management Canada, suggests the following:
- Using the categories of risk from above, start by identifying the risks that relate to your farm. Risk management isn’t just about things you can cover with insurance. In fact, most risks can probably be dealt with directly on the farm with a little planning. Consider as many possibilities as you can: health and safety, finances, marketing, technology, public trust, farm transition, relationships with people (family, employees, suppliers, buyers, consultants, contractors), legal risks and regulations, and even your own personal health.
- Once you’ve identified the risks most likely to affect your business or project, take a few minutes to prioritize them so you know where to start when it comes to managing them. Simply jot the risks down on paper, assign a probability number from one to five (one being highly likely it could happen) and list any potential consequences. Using the same scale, rank the impact(s) this event would have on your farm. Multiply the two numbers (frequency/likelihood and impact); the risks that score the highest are the ones with the highest risk level. Alternatively, you can use a graph with four quadrants to plot frequency/likelihood against impact to visualize your risk priorities. Using a risk scorecard or map like this allows you to easily identify significant risks at a glance and helps you determine which control measures should be implemented to mitigate them.
- After your assessment, think of how well prepared you are to face those risks, especially the risks that rank top priority. What measures do you have in place to mitigate them? What tools could you use to put measures in place? Are you insured? Are you using a government Business Risk Management (BRM) program? And, most importantly, have you planned for this risk? Some best practices are simpler than you may think. For example, for operational risks, do you have standard operating procedures? For marketing risks, do you have contracts in place with your buyers or suppliers? For people risks, do you have an employee benefits plan to retain good employees (benefits do not always equate to salary!) or do you have staff events to recognize their hard work? For strategic risks, do you have regular meetings to review your progress against goals?
- Once you’ve figured out what risk management strategies are already in place, revisit your risk prioritization list to see which categories aren’t covered. This is an important step because there’s no point focusing on risks that you’re already managing. Instead focus on the ones that you’re not managing well to help reduce your overall risk exposure.
- Finally, build an action plan: Determine which best practices can be used to mitigate the high-level risks that aren’t well covered, assign someone to take care of it, and set a realistic timeline to put that mitigation measure into action so it won’t be put aside and forgotten about. And don’t forget to follow up on your plan!
“This may seem like a lot to do on your own, but there are tools (see below) out there that can help, including farm consultants and advisors,” says Lipari. “And even if you can avoid or reduce just one risk event — avoid one farm accident or a deal falling through because you didn’t have a contract — it will have been worth the investment in time and money you spent on a risk management plan.”
Three steps to take today
Keep yourself awake in the tractor cab by doing some war-gaming exercises. A role-playing exercise adopted from the military and usually done on executive teams, war-gaming is essentially a simulation of a specific situation where the outcomes are unknown. What decisions and actions would you take if X occurred? What would the repercussions be? Did your response(s) solve the problem, or do you need to develop a new line of attack? It’s a great way to informally develop risk mitigation strategies.
Train your brain to be risk ready: By attending farm shows, conferences or webinars you’ll stay up to date on the latest tech, tools and tips. Knowing the array of options out there will help you find the right mix of risk management tools and processes for your farm.
Rather than expand your operation horizontally, look at adding revenue streams through diversification (see last month’s column) to optimize the resources you have on hand and spread risk over your existing operation.
April M. Stewart is the owner of Alba PR, a brain-to-brain communication design firm, and the creator of “The Farmer’s Survival Guide: How to Connect With 21st Century Consumers,” a blog and workshops which look at communication impact boosters. She is also a sixth-generation Quebec dairy farmer, president of Canadian Young Speakers for Agriculture and a member of the Canadian Agri-Business Education Foundation board. You can find her on Twitter under @FarmersSurvival.