Step 4: Determine Risk Sources

by Aaron E. Sprague

The first step in Tactical Risk Management is to determine and prioritize the risks that an operation faces. This is a critical step to the success of the entire process. Through the use of the techniques in this step the strategic risk management process, or SRMP, will enable a producer to identify, quantify, organize and prioritize risks, ultimately leading to the ability to discern what risks threaten the operation. In order to identify risks faced by an operation, five specific sources of risk in production agriculture have been determined. Most risks faced by an operation fit into one of the categories:

Production Risk – Uncontrollable events such as weather, pests, or disease that make crop or livestock yields unpredictable.
Market or Price Risk – The changing of prices for outputs and/or inputs as a result of domestic and international supply and demand relations occurring after the producer commits to a production plan.
Financial Risk – Risks associated with the attainment of capital to operate an agricultural business throughout the biologically lagged production cycle.
Institutional Risk – Unpredictable changes in policies and regulations, often governmental, which can affect the profitability of an agricultural operation.
Human Resource Risk – Risk introduced through unforeseen changes in the character, health, or behavior of people involved in the agricultural operation.

Using the SRMP tools to determine and prioritize risks, a producer will learn these definitions as well as be trained on how to categorize a risk into one of the five categories.

Most of the risks faced by agricultural producers are very Mature corn in field complicated. Therefore, it is only the beginning of the step to determine what risks are faced by the operation. After the sources of risk are identified, it is important to prioritize the risks with respect to the particular operation. This can be accomplished in many ways. Two tools that SRMP uses to help prioritize sources of risk are the Influence Diagram and the Risk-Influence Chart.

An Influence Diagram is a graphical representation of the risk being analyzed. It provides some structure to analyzing risk management decisions that are often complex and circuitous. One particular type of Influence Diagram used in the SRMP is the Contributing Factor Diagram (CFD). Instead of attempting to capture all of the relationships inherent in a risk situation, the CFD focuses on the logical or most important relationships in a decision.

Risk-Influence charts can be used to finish prioritizing risks. The idea behind the Risk-Influence chart is straight forward: risks can be prioritized through the evaluation of how much a particular risk impacts a particular operation as well as how much a particular operation can influence that risk. Once a producer has determined the sources of risk that the operation is exposed to, priority can be given to the risks that are high and that can be highly influenced by the operation. On the other hand, decisions that entail low risk and low influence by the operation can be given lower priority.

Through determining and prioritizing risks, the operation will create a type of roadmap for the rest of the tactical steps that will allow for efficient strategic risk management at the farm level.