FBM Chapter 11 - Risk Management

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Questions and Answers

What is the farmer's breakeven price per bushel?

$100

$3.70

$180

$5.00 (correct)

What is the farmer's maximum exposure to market risk?

$5.00

$23,400 (correct)

$100

$180

What is the number of production units for the farmer in this scenario?

100 (correct)

180

$3.70

$5.00

If the farmer sells his corn at $4.50 per bushel, will he make a profit or suffer a loss?

Loss (C) Signup and view all the answers

What does the term 'F' represent in the market risk exposure formula?

The lowest possible price of the commodity (D) Signup and view all the answers

Which of the following is NOT a potential liability risk associated with real property on a farm?

Damage to farm equipment (D) Signup and view all the answers

What specific type of farm operation is highlighted as having a heightened risk of environmental liability?

Livestock operations with manure lagoons (D) Signup and view all the answers

What is the most likely source of a major liability claim against a farm?

Product liability claims related to the consumption of farm products (B) Signup and view all the answers

What type of real property structure is specifically identified as being particularly dangerous due to the risk of accidents?

Grain storage silos or bins (C) Signup and view all the answers

What is the potential financial consequence for farm owners in the event of a fatality on their property?

Potential millions of dollars in damages (A) Signup and view all the answers

What kind of liability arises directly from the operations of a farm, according to the text?

Liability from activities (D) Signup and view all the answers

Which of the following is NOT mentioned in the text as a type of mobile equipment that poses a liability risk to farms?

Aircraft (D) Signup and view all the answers

What is the primary concern related to mobile equipment on farms, as described in the text?

Injury to people while in use (D) Signup and view all the answers

What does legal risk primarily deal with?

Legal liability and compliance with laws (B) Signup and view all the answers

Which of the following is considered legal liability in the context of farm management?

Injury caused to someone by farm equipment (D) Signup and view all the answers

When assessing legal liability, a farm manager should focus on what type of risks?

Broad categories of legal liability (A) Signup and view all the answers

Which properties are primarily associated with legal liability for farm businesses?

Real property and mobile equipment (B) Signup and view all the answers

What is the definition of 'property' within the context of legal risk on a farm?

Any asset that the farm owns (D) Signup and view all the answers

What type of liability is particularly significant for livestock producers?

Liability concerning the farm's animals (D) Signup and view all the answers

How can legal liability potentially impact a farm or business?

It could lead to bankruptcy (D) Signup and view all the answers

Which aspect is NOT typically included in the assessment of legal liability risks on a farm?

Assessment of insurance premiums for property (A) Signup and view all the answers

What is market risk as it relates to farming?

The risk of losing income due to changes in the price of a farm's products. (D) Signup and view all the answers

When does a farmer's exposure to market risk begin and end?

From the time the farmer purchases inputs until the farmer sells the commodity. (A) Signup and view all the answers

Which of these factors increases a farmer's market risk?

Growing a crop that takes a long time to produce. (D) Signup and view all the answers

What is the significance of the time between purchasing inputs and selling the commodity in terms of market risk?

It helps determine the amount of market risk exposure. (A) Signup and view all the answers

What is the formula used to calculate market risk exposure?

$(Y(B - F)) \times A$ (A) Signup and view all the answers

What does "Y" represent in the market risk exposure formula?

The expected yield per unit of production. (C) Signup and view all the answers

What does the formula provide?

The total amount of risk a farmer faces due to changes in the price of the commodity. (A) Signup and view all the answers

Why is it important to update a risk management plan for a farm?

To reflect changes in farm operations (D) Signup and view all the answers

What could be a consequence of failing to update a risk management plan?

Suffering avoidable losses (C) Signup and view all the answers

What is the priority assigned to the risk of employee injury from chemicals?

High (D) Signup and view all the answers

Which method is used to transfer market risk when pricing commodities?

Hedging techniques (B) Signup and view all the answers

What should be recorded as part of the implementation plan in a risk management strategy for market risk?

The sale of the commodity (D) Signup and view all the answers

Which of the following statements about risk management plans is true?

They need to be continuously updated (D) Signup and view all the answers

What is the exposure associated with the risk of employee injury from chemicals?

In excess of $5 million (D) Signup and view all the answers

What is the control mechanism mentioned for managing employee injury risk?

Regular audits of chemical usage (D) Signup and view all the answers

Which factor does NOT contribute to determining the effectiveness of a risk management plan?

The popularity of the commodities (D) Signup and view all the answers

How should exposure from the commodity price falling below profitability be managed?

Using a commodities broker (D) Signup and view all the answers

What is the primary risk associated with a farm's capital structure?

The risk of not being able to pay debts and going bankrupt (D) Signup and view all the answers

What specifically is the risk associated with a farm's money or cash flow?

The risk of not having enough liquid assets to pay debts as they arise (A) Signup and view all the answers

What is the main issue concerning a farmer with a debt that needs to be paid in the middle of the cropping season?

He may not have the cash to pay the debt. (D) Signup and view all the answers

What is the potential outcome for a farmer who faces significant financial risk and has limited liquid assets?

They could face bankruptcy and lawsuits from unpaid debts. (B) Signup and view all the answers

What is the significance of having access to cash at all times from a risk management perspective?

It allows farmers to pay for their operating expenses and avoid financial risk. (D) Signup and view all the answers

Which of the following is a key component of a farm's capital structure?

The amount of debt and equity used to finance the farm's operations (B) Signup and view all the answers

Which of these statements accurately reflects the concept of solvency?

The ratio between a farm's debt and equity, indicating its financial stability (B) Signup and view all the answers

When is the direct loss from a crop loss the greatest?

When the loss occurs late in the production stage (A) Signup and view all the answers

Study Notes

Risk Management Introduction

Sun Tsu's quote, "If you know your enemy and yourself, you will not be defeated in a hundred battles," emphasizes the importance of understanding both internal and external factors for organizational success. Risk management is a crucial process for looking at the external environment, identifying threats, and defending against them while learning the firm's internal processes.

Risk Explained

Risk management is a process requiring managers to learn about their businesses and the threats that endanger them. This learning allows better identification of threats and mitigation strategies.
Risk is pervasive and inherent in all endeavors. Left unmanaged, risk can destroy the value of efforts.
The worst case for a business is bankruptcy and asset loss. Risk management is crucial for defense.
Risk is defined as uncertainty. This uncertainty exists in daily events and farm operations.
Fear of the unknown (uncertainty) hinders managerial decision-making, harming a business's potential.
Effective risk management provides clarity on potential downsides of decisions.

Risk Management Process

Risk management is a multi-step process. The process involves identifying and minimizing exposure.
It is a 5-step process: identify, monitor, prioritize, plan, and implement.
Risk management is an ongoing, continuous process, requiring updates to reflect changes in operations.

Identifying Risks

Risk identification begins with a risk audit of the farm's environment.
This process assesses potential risks, and evaluates the exposure (potential loss) the farm faces.
The USDA risk framework categorizes risks into 5 types: Market, production, financial, legal, and human.

Market Risk

Market risk is the fluctuation in commodity prices.
Exposure lasts from the initial production planning to sale.
Market risk is particularly relevant for producers of longer-production-cycle commodities.

Production Risk

Production risks deal with the yield of agricultural products.
Factors like weather (storms, floods, hail, etc.), diseases, insects, and accidents all contribute to production risks.
Loss from production risks have direct and indirect components. A direct loss is the loss of assets directly impacted, while an indirect loss is the loss of potential income.

Financial Risk

Financial risk deals with the capital structure and financial flows of the farm.
Solvency is the ratio of debt to equity. High debt ratios increase the risk of bankruptcy.
Liquidity refers to a firm's ability to pay debts when due, preventing financial strain. Cash flow is critical, ensuring daily operational costs are covered.

Legal Risk

Legal risk involves potential legal liabilities.
Legal liability covers injuries or property damaged to others on the farm.
Two broad categories of legal liabilities are risks from properties and risks from activities.

Human Risk

Human risk concerns the safety of farm workers and owners.
Farm work can be hazardous; therefore, injury or death are possible risks.
The potential for injuries arises from equipment, farm chemicals, and specific farming activities.

Prioritizing Risks

Risk management must prioritize risks based on their potential impact.
Prioritizing helps determine which issues require immediate attention to minimize harm.
The order of risk prioritization should consider which risk is most likely to cause farm bankruptcy.

Risk Management Plan Implementation

Implementing a risk management plan involves putting controls in place, ensuring sufficient funds are allocated to manage retained risk, and transferring remaining risk through insurance when appropriate.

Monitoring Risk Management

Ongoing monitoring of implemented plans is crucial for success.
Regularly evaluate the effectiveness of control measures, track and process claims, and adjust plans as necessary.

Risk Management Plan Updates

Risk management plans must be updated whenever farm circumstances (acreage, operation changes) change. Updated plans are key to effectively managing risks.

Sample Risk Management Plans

Sample plans illustrate how to assess, prioritize, and implement controls, transfer, or retain specific risks.

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Description

Test your knowledge on the financial aspects of farm operations and the potential liabilities farmers face. This quiz covers breakeven pricing, market risks, and common liability issues associated with farming. Understand the economic and environmental factors that impact farm management.