Ag Risk Management

Jan 4, 2024 | Uncategorized

The known unknown framework can help farmers and ag managers identify and categorize risks inherent to the ag industry.

Popularized following the 2008 financial collapse, this matrix helps classify risks based on the knowledge we have of them.

→ Known Known Risks: These are the risks you’re aware of and can quantify.

For a farm, this could include predictable and measurable risks like price fluctuations in the market for your crops or livestock, seasonal weather patterns that impact production, or the anticipated maintenance costs of farm equipment. You can manage these risks by setting up futures contracts for your crops, diversifying crop types, investing in specific crop varieties, and maintaining a robust equipment servicing schedule.

→ Known Unknown Risks: These are risks you know exist but can’t predict their likelihood or impact accurately.

In farming, this might include the potential for a disease outbreak in livestock or the sudden onset of a plant pest infestation. While you know these risks are real, the timing and severity are uncertain. To mitigate these, you might invest in comprehensive insurance policies, engage in regular veterinary check-ups for livestock, or keep aware of regional disease and pest reports to act swiftly if necessary.

→ Unknown Known Risks: These are risks that should be on your radar but are often overlooked due to negligence or complacency.

For example, you might undervalue the risk of water scarcity or ignore the legal implications of hiring practices. Such oversight can lead to significant issues. Ensuring that you are fully aware of regulatory compliance, environmental changes, and resource availability, and incorporating them into your risk management strategy, is crucial to safeguarding your farm’s future.

→ Unknown Unknown Risks: These risks are completely off your radar and impossible to predict or measure in advance.

For instance, the emergence of a new plant disease or an unprecedented weather event could drastically affect your operations. While these “black swan” events are rare, they can be catastrophic. To prepare, you should develop a robust business continuity plan that includes emergency funds, backup suppliers, various insurance policies, and alternative distribution channels to remain operational under unforeseen circumstances.

By adapting the known unknown framework to your farm or ranch management practices, you can systematically:

  • Identify
  • Assess
  • Address

the multitude of risks associated with agricultural production.

This strategic approach can help you minimize losses, enhance resilience, and secure the long-term sustainability of your farming business.

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