Risk management for the dairy farm
Author: Coralee Foster
Date: November 2010
Publication: The Milk Producer
Risk management is an important component in managing a business. Owners must identify and evaluate their risks, and then create plans to reduce their impact. With many kinds of risks possible in a dairy operation, most producers are well-versed in handling those related to production and marketing. However, there are also countless legal, human resources and financial risks that face every operation and are not always given the same amount of attention.
Legal risks
Legal risk can come in many forms. Increased agri-business complexity has required farm managers to identify potential risks and seek out professional advice where needed. Farmers must identify potential legal issues, beginning with establishing the appropriate legal business structure for their operations: a corporation, partnership or proprietorship.
Estate and succession issues, such as establishing Power of Attorneys and updating wills, should be revisited regularly to ensure that current legislation is being used, as well as to address any changes in personal circumstances. Professional advice may be needed for contractual arrangements and borrowing agreements, statutory obligations, employment standards, payroll and environmental legislation, general liability, and food safety regulations.
To mitigate legal risk, find a lawyer who is familiar with farm legal issues and consult with him/her on new ventures or contracts. Make him/her part of your succession planning team. Ensure that your lawyer is engaged at the first sign of a potential legal problem in order to help you mitigate further damage or exposure.
As many legal risks can be covered by a good farm insurance policy, it is also necessary to have insurance coverage. Policies should be reviewed regularly with the provider and updated in the event of changes in the operation. In particular, you should revisit liability coverage limits and deductibles to ensure that a single mishap does not threaten the existence of your farm.
Human resource risks
Many dairy farms historically employed only family members and the occasional casual labourer. However, the current size of many operations ― or the family dynamics of the owners ― means that human resource (HR) management has become an increasingly significant risk. The potential risks in this area include attracting and retaining suitable workers, dealing with workplace injury, and planning for succession.
Mitigating HR risk involves proper organizational structure (an informal structure may no longer be suitable) with the roles, responsibilities and reporting of all family members and non-family employees clearly defined. This may also involve setting job descriptions as guidelines for how and by whom work gets done.
Most successful companies provide consistent feedback to their employees through performance evaluations and, in family business situations, it is no less important. The review process should set goals for the next period, show employees how they are doing and their contribution to the business, provide clear guidelines for improvement, give employees the opportunity to share their concerns and outline their goals, and help employers identify any training needs.
A proper compensation package is also very important. This outlines if family members will be paid according to market value or some form of income sharing, keeps everyone involved in the business and working towards a shared goal, and guides all family members in making decisions about who gets paid how much and for what. Finally, when it comes to health and safety, operations must ensure that they are in compliance with the appropriate legislation and employment standards set for their province.
Financial risks
The first step in mitigating financial risk is to maintain adequate farm records and make use of the information that these can provide. A well-maintained manual or computerized accounting system is critical since more than just annual financial statements and tax returns can be prepared from this data. If managed properly, the basic bookkeeping system can also assist in determining the operation’s cost of production, calculating various financial ratios to allow for comparison to industry or financial institution benchmarks.
Mitigating risk also involves monitoring debt. In addition to a regular review of interest rates, producers should monitor the due dates of long-term financing and assess how much is fixed and how much is open. A review of the security and guarantees provided to lenders should be updated regularly, while opportunities for other sources of credit besides the traditional lenders should be carefully considered.
Producers need to have liquidity available, as well as adequate cash flow. Cash flow projections should be made carefully and form the basis for setting up financing, rather than attempting to manipulate future cash flows to accommodate a rigid debt repayment plan. In situations where liquidity is a concern, owners should examine whether there are ways to use existing resources more efficiently by selling under-utilized assets and renting or hiring certain work to be done. Sometimes arrangements to share equipment with other similar operations can be a viable option.
Lastly, the appropriate use of insurance programs should also be considered in maintaining liquidity. Insurance can be a valuable tool for maintaining cash flows through a difficult period. As there are many different insurance products available, it is imperative for farmers to understand their coverage, its cost, and whether it meets their needs.
Risks in any farming venture cannot be eliminated. However, they can be mitigated with good planning and consideration.
Coralee is a Chartered Accountant and partner in the Mitchell office of BDO. She serves clients throughout Perth, Huron and Oxford counties, providing accounting and tax services to a variety of agricultural operations. Her family farms a livestock and crop operation in Perth County.
