How farmers can manage their financial risk

(NC) Farming can be a rewarding career, but it’s never been an easy one. The latest challenge facing farmers is the recent rise in trade uncertainty. When trade conditions can change by the day, farmers often can’t know what prices their exports will earn. It’s put the emphasis on resilience, flexibility and farmers’ ability to navigate risk.

Classic risk management strategy is to assess your risks one by one based on how likely they are to affect your business, and their level of impact if they do. Then, for each risk, determine if it makes sense to avoid, transfer, reduce or retain it. Here’s a breakdown of what that can look like for a farm:

Keep plans flexible to help avoid trade risks. If the past couple of years has taught us anything, it’s not to take trade conditions for granted. International pricing is much less predictable than it used to be, with producers and buyers now having to factor in the possibility of suddenly imposed or withdrawn tariffs on their goods. Avoid getting caught out by diversifying production and leaving room in your business plan for a quick pivot if it becomes necessary.

Insure to transfer environmental risks. The agricultural sector was one of the earliest to feel the effects of climate change, as extreme weather events become more and more common and severe. Some insurers have offerings tailored for farm businesses, and insurance is a tool that’s best suited - for this sort of risk—high-impact, and tough to address by other means.

Get creative to reduce market risks. Carry out market research to get an accurate sense of what consumers actually want, so that you can plan your production to meet their demand. A brand is a powerful asset for any business, so don’t neglect yours. Marketing your farm on multiple channels can help you reach a wider range of buyers, and direct marketing efforts can help build buyer relationships and potentially capture a higher price for your product.

Determine your appetite for retaining risk. Some risks really are “the cost of doing business,” but which risks, and to what extent will vary. Take an honest look at the market, trade and environmental risks your farm faces to help determine how much you’re able, or willing, to take on. Once you know how much risk you’re willing to accept, you can make more confident decisions about how much to invest in equipment and expansion and any debt that may come along with your growth.

Learn more about managing your farm’s risks at rbc.com/riskmanagement.