Risk management 2: Production

Weather and weather-related factors, such as pest and disease, have all been considered a big risk for farm businesses. That's even more true today, because farmers do not have the luxury of allowing themselves to suffer a "poor" year through weather-related threats to production. Production systems have to be as efficient - and robust - as possible to mitigate the threat of poor weather on yields.

Budgeting and benchmarking are a good way to start to identify what risks are involved in production. Regularly monitoring the forecast and budget gives an early warning of any threat to the production targets - and the potential to lessen the impact. Simply writing a budget and forecast reveals the risks.

Budgeting

Budgeting should be an annual process. It details all the expected costs, income and physical performance for each enterprise. These figures should be realistic and achievable. Historic benchmarking for the farm may help in achieving this.

From these figures, for each enterprise, a budget for profit and loss, cash-flow and sometimes balance sheet are drawn up. It is important to regularly monitor the budgeted versus actual performance.

Variance analysis will highlight areas under-performing and allow corrective action to be taken. This will cut the risk of not hitting budgeted performance levels.

Benchmarking

A business is at risk of under-performing if it does not understand what its performance level should be. Benchmarking allows a business to identify desirable levels and can assist in targeting areas of weakness. Comparing the business to others or industry averages can be a powerful tool.

The real power of benchmarking comes from detailed financial and physical comparisons. Benchmarking is an improvement process in which a company measures its performance against another company, determines how that company achieved its levels and uses the information to improve itself.

Before producing the figures with which to compare against, three questions need answering:

1. What in the business will be benchmarked?

The business must identify its key performance indicators (KPIs). The KPIs will be the issues of paramount importance for success and will include indicators such as feed costs per litre on a dairy farm, piglets per sow a year on a pig farm or horse power per hectare on an arable farm.

Once these are identified, a standard way of producing the figures for benchmarking will be needed. Without agreed standards comparisons become meaningless.

2. What information is needed to benchmark?

Systems will need to be put in place to capture the data, which will usually come from management accounts and computerised farm records.

3. With whom will the data be compared?

There are a number of sources of data for comparison including:

• Industry average figures, eg Farm Management Pocket Book.

• One of the industry benchmarking programs which provide anonymity for the individual, eg RMIF, Better Returns Program (EBLEX) Milkbench (MDC), Cropbench (HGCA).

• A closed, peer, benchmarking group The more detailed the information is, the more valuable the comparisons, but trust becomes increasingly important where financial data are compared. The comparisons will clearly show which areas of the business are under-performing.

Regular benchmarking and implementing changes will help encourage an environment of continual improvement. This will reduce the risk of the farm/enterprise becoming uncompetitive and should help develop the right skill base among owners, managers and farm staff. To help assess where risk might be identified here are two examples - one arable, one livestock. These are simply indications of risks that might exist and ways of developing strategies to mitigate them.

Arable example

The cropping mix

• Shorten rotations to optimise highest returns.

• Risk of disease/pest build-up.

• Risk of weed resistance build-up.
  

All winter cropping

• Weather; not allowing all to be planted - high risk on heavy land.

• Insufficient machinery capacity - a particular risk if machinery is committed to one cultivation/sowing system.

• Insufficient labour - can risk be offset with contractors? How much can you afford to spend on (and rely on) crop consultants?

Seed and variety

Assuming varieties are chosen to minimise risk, ie matched to market need, meeting the specification is then important, as failure to deliver what the contract says may result in no sale or penalties. Husbandry and cropping must be geared to delivery of contract terms. Then options/ risks are:

Certified seed

• More expensive, but risk controlled and mitigated by terms of trade.

Farm-saved seed

• Impurities.

• Labour shortfall for autumn land preparation.

New variety

• Can you optimise yield on land?

• Does the market want it?

Established variety?

• Losing out on yield/quality advances.

• Miss out on innovation.

Minimise risk by trying out new varieties on limited acreages, no more than 10%. One or two varieties only for simplicity.

• Disease epidemic/ resistance breakdown.

• All coming to harvest at once.

Multiple variety choice

• Insufficient time to manage through season.

• Insufficient storage capacity to segregate/ store. 

2. Livestock example

A herd health plan

A herd health plan will identify and cut the risks of introducing disease and offer a preventative programme for existing conditions along with a recording system to monitor herd health and welfare. The records should chronicle the incidence of specific health conditions and act as a base upon which to review the plan on an annual basis. The prevention and control of disease should not be left to chance. The plan would usually be prepared with the farm vet.

The issues that would normally be addressed in a herd health plan would include:

• Routine hoof-care.

• A mastitis action plan.

• Fertility including protocols for all the expected routine problems.

• Infectious diseases along with a vaccination programme.

• Metabolic and digestive disorders.

• A parasite control programme.

• Routines for managing sick animals including procedure for identifying treated animals.

• Biosecurity measures.

• The management of newborn animals.

• Procedures to ensure broken needles and other foreign bodies do not contaminate meat.

Summary

Business strategy affects risk. Each enterprise has risks that must be managed on an annual basis. Some have specific risks in relation to labour and machinery and diversification brings new risks beyond those normally experienced. But most of these risks can be identified and managed.

Key management activities include:

• Benchmarking - to establish the performance level that the business should be achieving.

• Budgeting and monitoring - to plan target performance and then monitor against that plan so that variances are identified early and corrective action taken.

• Keeping up to-date - with technical innovation to ensure that there is a competence to address the on-going annual risks associated with each enterprise and to ensure that the business maintains the benchmarked performance which constantly improves.

• An awareness of specific risks - that the business and its enterprises face. In many cases, whether it is disease, over-exposure to specific suppliers, buyers or enterprise, these can be addressed with contingency planning.