Managing strategic risks on the farm: Insight from Purdue ag economists

WEST LAFAYETTE, Ind. — In an episode of Purdue Agriculture’s “Managing Strategic Risks on Your Farm” podcast series, agricultural economists discussed how you can position your farm to not only survive, but actually thrive in a risky world.

Farms are exposed to strategic risks that are caused by a wide variety of unanticipated shocks to the operating environment, ranging from government policy shifts to disease outbreaks.

Although it’s not possible to accurately forecast strategic risks, it is possible to position your farm business such that you can successfully navigate the risks that might occur, the ag economists said.

Michael Langemeier, professor in the Department of Agricultural Economics at Purdue, stressed the importance of having several contingency plans in place.

“Anytime I’m looking at a long-range plan, I think in terms of scenarios,” he said. “What’s my best prediction of the way things might happen? And think about what I would do under that scenario.

“How aggressive would I be in terms of buying land? How aggressive would I be in terms of renting ground? How much machinery capacity do I need under my best estimate of prices, and so on.”

Langemeier recommended having a best-case and worst-case scenario plan in place. If there is a big shock that negatively impacts agriculture, such as another pandemic, how will that impact your decisions?

“Does that change the inputs I purchase? Does that change the way I think about renting ground? Does that change the way I think about buying machinery or hiring labor? Think about that in terms of all the resources that you have on the farm,” he said.

For a best-case scenario, Langemeier said, think about what you would do if corn prices shot up $1 or $1.50.

Find the rest of this series and related resources at https://tinyurl.com/managingstrategicrisks.

Here are a few other highlights.

“The environment that we operate in here in agriculture is a dynamic environment. Stuff changes, new risks come up. Risks that are pertinent today will not be relevant here in four or five years. So, you’ve got to constantly be scanning that external environment. And then it goes back to step one, anticipating the risk, right? So, it’s just a continual loop of identifying the risk. Scenario planning, resource planning to determine the resiliency you want to build in, executing the strategy to build on that — and then it’s back to the beginning.”

Brady Brewer, associate professor

Purdue Department of Agricultural Economics

“Shocks are not necessarily predictable because there are things like government policy changes, maybe a geopolitical conflict like the Ukraine-Russia conflict, maybe a disease like COVID, changes in consumer preferences, shifting weather patterns, technological uncertainties, etc. We know you can’t predict those things, but you can do some planning, using ‘what if’ scenarios. If X, Y, or Z happens, I know that’s going to be something that I need to react to in terms of my strategic position. So, I’m going to come up with scenarios to adapt to a change.”

Michael Langemeier, associate director

Center for Commercial Agriculture

“One of the things you want to do is assess the likelihood of these things happening. But you want to have some scenarios and say, ‘OK, this might not be a high probability event, but what would I do in the event that it did happen?’ Because that’s one of the key aspects of strategic risk. We’re talking about things that don’t necessarily have a high probability of occurring, but if they do occur, they could have a very large or significant impact on your business and your ability to continue.”

James Mintert, director

Center for Commercial Agriculture