Risky Business

Risk may be transferred from one entity to another, where the other entity is more willing to bear the risk. A great example in the grain industry is the process of hedging, where a farmer or elevator guards against the risk of price changes in one asset by buying or selling another asset whose price changes in an offsetting direction. Risk may also be transferred or shifted through contracts. A “Hold-Harmless” agreement in which an entity assumes another entity’s possibility of loss is an example of such a transfer. For example, a tenant may agree under the terms of a lease to pay any judgments against the landlord which may arise out of the use of the premises. Insurance is a means of shifting or transferring risk. (Insurance is also an example of “sharing risk” as described below.) In consideration of a specific payment (a premium) by one party, a second party contracts to indemnify (pay for hurt, loss or damage) the first party up to a certain limit for the specified loss that may or may not occur.

Sharing Risk

Believe it or not, the corporation is one method/tool of sharing risk. In this form of business, the investments of a large number of people are pooled; thus, each bears only a portion of the risk that the enterprise may fail. Insurance is another method for dealing with risk through sharing, and, in fact, it only works if a group of people participate and due to the laws of averages/probabilities that certain events will occur.

Reducing Risk

Risk may be reduced in two ways: The first is in preventing or managing loss, and the second is in controlling loss should it occur. There are almost no sources of loss where some efforts are not made to avert the loss — these include safety practices and other strategies we will touch on below. Unfortunately, no matter how hard we try, it is impossible to prevent all losses. In addition, in some cases the loss prevention may cost more than the losses themselves. The second method of reducing risk is controlling the severity of loss once it occurs. Examples here are sprinkler or alarm systems.

A risk management system

Risk management involves five basic steps:

Identifying risk: Brainstorming sessions initially amongst management and then involving your staff and other employees can allow you to develop lists of possible risks your feed mill or elevator faces.

Measuring the risk: This can involve developing a risk analysis matrix (further discussed below) where you take the risks you have identified in step one above, and simply rate the probability of their occurrence in a “high, medium, low” fashion.

Formulating strategies to limit your risk: As we will discuss in more detail below, management must determine how to address the risks your firm faces. Insurance, contingency plans and education such as safety training are useful tools here.

Carrying out specific tactics to implement your strategies: This step of your risk management plan involves carrying out your plans and putting them to work.

Continuously monitoring your efforts: As with any aspect of management (i.e., strategic planning, human resource management, financial management), constant monitoring of performance is needed to ensure that your strategies are appropriate and are accomplishing the intended goals. This can be especially important with risk management. For example, it is one thing to develop a set of safety protocols/standard operating procedures; it is another thing entirely to make sure these are utilized properly and consistently by your employees.

Risks specific to the feed and grain industry

As with any industry, there are certain risks specific to the grain and feed industry. We cannot list all of the risks you face, but hope to highlight some of the key ones and suggest some possible management strategies. Market risk is faced by firms in any industry, and grain markets face volatility due to weather and associated supply shocks, exchange rates, the vagaries of transportation (fuel prices, etc.), and in recent years the effects of swings in demand for energy as a result of government ethanol legislation as well as other policy interventions. Hedging in the futures market is one strategy for dealing with grain price risk. Effective utilization of numerous and varied information sources is another strategy to deal with market risk, as information helps you manage this type of risk.

Grain quality and/or feed spoilage is another source of risk faced by our industry. Good management here means proper aeration of stocks, grain turns as appropriate, and fumigation for mold or insects (see sidebar). Dust explosions — we all know that grain dust can be dangerous due to its potential for explosion. Thus, good dust suppression practices are a great risk management strategy.