Risk Management PDF

Risk Management DXP02711 —UN—23FEB11 INTRODUCTION DXP05272 —UN—22JUL14 The Chinese general and philoso...

Risk Management DXP02711 —UN—23FEB11 INTRODUCTION DXP05272 —UN—22JUL14 The Chinese general and philosopher Sun Tsu wrote in to the overall success of an organization. This relates to The Art of War, “If you know your enemy and yourself, risk management because risk management is the process you will not be defeated in 100 battles.” In this quote, the of looking at the outside environment of the firm and General is saying that the ability to look at both the internal determining ways to defend the firm from those outside and external environments of an organization is important threats while learning the internal operations of the firm. SP63763,3BAA20A -19-23JUL14-1/1 11-1 090117 PN=176  Risk Management RISK EXPLAINED Risk management is a process that forces managers to learn businesses they manage and the threats that imperil the business. By studying the risk management process, one will become better able to recognize threats to the firm and find solutions to neutralize or otherwise mitigate those threats. The world is a scary place. It is fraught with perils, hazards, and uncertainty. To put it another way, risk is everywhere, it surrounds us, and it is all-encompassing DXP05238 —UN—14JUL14 in its nature. No matter what someone is doing there is always risk involved, and, when left unmanaged, risk can destroy everything that someone has worked for in pursuit of a goal. It is because of the need to defend the farm’s assets that farm business managers must manage risk. The worst possible scenario for a farm or any business is that the business goes bankrupt and loses assets the owners have worked hard to gain. It is important for Fig. 1 — Risk management helps to protect a lifetime of investments managers to defend the firms they manage from this risk. So, in the mindset of building a good defense, we will discuss risk management. SP63763,3BAA20B -19-24JUL14-1/1 RISK MANAGEMENT Risk management is the practice of identifying and minimizing exposure to risk. When we consider the term risk management, we must first have an understanding of what risk is. There are many definitions of risk, but the most prudent definition for farm managers is that risk is uncertainty. When we think about it, there is uncertainty in everything that we do. When you wake up in the morning to go to school, there is no certainty that you will make it on time. You could be stopped by every red light in town, there could be an accident that delays traffic, or you could have a flat tire. Likewise, when farmers plant a crop, they cannot be certain that the crops will not be damaged during the growing season. Farmers also face uncertainty with DXP05229 —UN—14JUL14 regard to the price of their crops; markets can be volatile. Uncertainty is prevalent in all human endeavors. As such, we must embrace the fact that not everything can be known. However, it is necessary for farm managers to do everything possible to reduce the amount of uncertainty faced in their operations to maintain the long-term stability of their farms. Fig. 2 — Risk is uncertainty When risk is thought of in terms of uncertainty, it is easy to see why uncertainty can be harmful to a business. seize opportunities for growth and make the best Uncertainty makes people fearful. How often have you decisions for the long-term potential of the farm. Proper heard someone express their fear of the unknown? risk management allows managers to understand the Fear has a chilling effect on a manager’s ability to downsides to a decision with certainty. SP63763,3BAA20C -19-24JUL14-1/1 11-2 090117 PN=177  Risk Management RISK MANAGEMENT PROCESS has a chilling effect on a manager’s ability to plan future business expansion and allocate resources in an effective Risk management is a process by which firms identify manner. Sound risk management practices act as a potential risk exposures, prioritize the risks faced by stabilizing force upon businesses. By giving managers the firm, plan to mitigate the exposures, implement the certainty they need to implement plans and grow their the plan, and monitor the results. In other words, risk businesses, the risk management function is an integral management is the practice of reducing uncertainty. Good part of the farm business manager’s duties. risk management practices allow a manager the certainty to plan and implement long-term strategies to achieve In order to achieve the stability and certainty that comes his or her long-term goal. from managing risk, it is important to understand the process behind risk management. The process is As discussed earlier, by reducing the uncertainty in a depicted by the flow chart below. farm’s operating environment, a manager is better able to develop and implement a winning strategy. Uncertainty DXP05220 —UN—07JUL14 Fig.3 — Risk Management Process The Risk Management Process is a 5-step process that consistently review the risk management plans for the allows managers to identify and deal with potential threats farms they manage. There are many changes that can to a business before they occur. This is very important to occur in businesses. Those changes must be reflected a business because that ability to plan for an event can in the firm’s risk management plan in order for the plan reduce the amount of damage that will be done to the to remain effective. The following sections will provide business in the long term if the event occurs. instructions on how to approach each step of the risk management process. As depicted in the diagram above, risk management is a continuous cycle. It is very important for managers to Continued on next page OUO1023,00042C1 -19-10AUG17-1/15 11-3 090117 PN=178  Risk Management IDENTIFY THE RISKS FACED BY THE FARM The first step in the risk management process is risk identification. The best way to perform this stage of the process is by conducting a risk audit. A risk audit is the process of looking at a farm’s operating environment and determining the risks the farm is exposed to by its operations, and determining the magnitude of the exposure to a given risk. Determining the amount of exposure a farm faces from a particular risk is very important when making risk management decisions. Exposure is the potential loss an entity can suffer from a given risk. Farms are exposed to risks from many different areas. This makes the risk audit somewhat difficult to do if starting with nothing. However, the USDA has introduced a risk framework that categorizes risks into 5 groups. They are: Market risk Production risk Financial risk Legal risk DXP05234 —UN—14JUL14 Human risk It is important to note that in this stage of the risk management process, one only needs to identify the risks faced by the firm and determine the amount of monetary loss that can be expected from the risk. The discussion of how to treat the risks comes in the planning stage of the risk management process. Fig. 4 — Farms face many risks OUO1023,00042C1 -19-10AUG17-2/15 MARKET RISK Market risk is the risk a farm business faces from changes in the price of the commodity it produces. Another term for market risk is price risk. The exposure from this risk is quite significant. Essentially, this exposure lasts from the time the farmer makes arrangements to produce the commodity until the farmer sells the commodity. For example, if a farmer wishes to produce corn on a plot of land, the farmer is exposed to market risk from the time DXP05228 —UN—14JUL14 the inputs to grow the corn are purchased until the corn is sold. Generally, market risk exposure is greater for producers of crops that take a longer time to produce. Thus, the lifecycle of the commodity, from purchase of inputs to the selling of the commodity, plays an important role in understanding the magnitude of the exposure. This means that producers of commodities with long lead times Fig. 5 — Commodity price changes affect market risk must be especially concerned with managing market risk. Continued on next page OUO1023,00042C1 -19-10AUG17-3/15 11-4 090117 PN=179  Risk Management Market Risk Exposure Formula In order to calculate market risk exposure, the formula in (Y(B-F))×A Fig. 6 can be used. Y = the expected yield per production unit (For grain producers this is typically bushels per acre) The following is an example of calculating market risk B = the breakeven price per bushel exposure. See Fig. 7. A farmer wishes to grow 100 acres DXP05273 —UN—22JUL14 F = the lowest possible price of the commodity* of corn on his farm. His breakeven price per bushel is A = the number of production units (For most row crop operations $5.00 assuming he produces 180 bushels/acre. The this will be acres) lowest possible price of his commodity is $3.70. So, in order for the farmer to break even he must get at least $5.00 for his commodity at the time of sale. If the farmer sells his corn at any price above $5.00, he will make a profit. If the price falls below $5.00, he will suffer a loss. Fig. 6 — Market risk exposure formula Using the above formula the market risk exposure of the farmer is as follows: Sample Market Risk Exposure In this case, the farmer’s maximum exposure to market (Y(B-F))xA risk is $23,400. Y (expected yield per production unit) 180 bu/acre B (breakeven price per bushel) $5.00 F (lowest possible price of commodity) $3.70 A (number of production units) 100 acres DXP05274 —UN—22JUL14 (180(5-3.70))100 = (180(1.30))100 = (234)100 = 23400 = $23,400 Fig. 7 — Sample market risk exposure Continued on next page OUO1023,00042C1 -19-10AUG17-4/15 11-5 090117 PN=180  Risk Management PRODUCTION RISK Production risks are the risks associated with the yields of agricultural products. This means that anything that can reduce the yield of the farm business’ commodity is included in production risk. This category of risk includes things such as wind, hail, lightning, tornadoes, insects, wild animals, diseases, hurricanes, droughts, floods, rain, fire, excessive heat, falling objects, wind drift from herbicides, and vandalism. Obviously, this category of risk is very expansive, so when conducting a risk audit it is best to look at the most likely events to occur. You could include risks such as a meteor falling from the sky and injuring your prized heifer in this category, but to do so you would DXP05225 —UN—14JUL14 need many hours and sheets of paper. Just stick to the big things in this category. There are many different things that can affect the production of agricultural commodities. As such, production risk can be very dangerous to a farm business’ long-term financial well-being. In order to understand the exposure to production risk, one must first understand how a production risk loss Fig. 8 — Foul weather is an example of a production risk works. If a farmer suffers a loss from a production risk, the farmer is actually suffering two different types of loss: a direct loss and an indirect loss. The indirect loss is calculated the same way as you A direct loss is the loss of any assets directly from the loss calculate revenue for a farm business (yield * price). event. An indirect loss is the loss of any potential value The reason it is important to note the difference between that could have existed from the lost asset. If a wheat field the indirect loss and the direct loss is because of the cash is struck by lightning and burns just as it is ready to be involved. If a farmer experiences a prevented planting harvested, the farmer loses the value of all the inputs he situation, there is no direct loss. Obviously this is not or she has applied to that wheat field. This is a direct loss. good, but the farmer still has not spent any money on The farmer also suffers an indirect loss of the potential the crop at this point. This means that the farmer still revenue he or she would have received from the sale of has the working capital he or she was going to use in the the commodity. production of the crop. However, when a direct loss does To calculate the exposure of production risk, you should occur, the working capital that is tied up in the production divide the risk into two categories: direct loss exposure, of the crop is gone. This means that if the farmer suffers and indirect loss exposure. a loss in addition to losing the potential revenue from the crop, he or she will also have to replace the working First, the direct loss is calculated by simply looking at the capital lost in order to operate the next year. value of the inputs used until the point of loss. This means that the later in the production stage that the loss occurs, the greater the amount of the direct loss. Continued on next page OUO1023,00042C1 -19-10AUG17-5/15 11-6 090117 PN=181  Risk Management FINANCIAL RISK Financial risk is the risk associated with the capital structure and money flows of the farm business. Capital structure is the amount of debt and equity in a given firm. This is because a farm’s assets are financed in two ways; debt and equity. Having too much debt can put a farm at risk of going bankrupt. The primary risk associated with capital structure comes from solvency. Solvency refers to the ratio between debt and equity. When debt is too high with respect to equity, then the farm runs the risk of not being able to pay its bills and going bankrupt. The risk associated with money or cash flows on the farm deals with liquidity. Liquidity refers to a firm’s ability to pay debts as they arise. For example, if a farmer has a debt come due in the middle of the cropping season, he may DXP05224 —UN—14JUL14 have the assets to pay the debt, but not the cash to pay off the debt. This means that the farmer is exposed to bankruptcy risk and lawsuits resulting from unpaid debts as he waits for his assets to become liquid. Remember: cash pays the bills. It is very important from a risk management perspective to have some access to cash at all times. The exposure to financial risk is the possible Fig. 9 — Too much debt can mean financial disaster bankruptcy of the farm. OUO1023,00042C1 -19-10AUG17-6/15 LEGAL RISK Legal risk refers to risks associated with legal issues. This category primarily deals with legal liability, but also can refer to risks arising from laws and regulations. Legal liability essentially means that someone other than you DXP05235 —UN—14JUL14 has been damaged by the farm’s property or the farm’s agents’ actions. This category includes things such as personal injury and property damage. When assessing legal liability risks, a farm manager must consider the things that can cause this type of loss. That being said, there are so many activities and properties on a farm that can cause damage to others it would be nearly impossible to list them all. So, when performing a Fig. 10 — Legal liability can bankrupt a farm or business risk audit, it is important to look for the large categories of legal liability and not get into the minutia of each and are many different types of property that a business can every possible liability event. own, but the two classes of property that cause the most concern with regards to a liability claim against you are: The following two broad categories are a good starting point for examining legal liabilities can that arise for farm Real property (buildings and land) businesses. They are liabilities from properties and Mobile equipment (essentially anything with a motor liabilities from activities. and wheels or tracks) Liabilities from Properties For livestock producers there is also a great deal of liability surrounding the farm’s animals. When discussing property, it is important to define the term. “Property” is any asset that the farm owns. There Continued on next page OUO1023,00042C1 -19-10AUG17-7/15 11-7 090117 PN=182  Risk Management Real Property When discussing liability risks associated with real property, a farm manager must be concerned with the risk of injury to others who come onto the property, and environmental or pollution liabilities that can arise from the property. The risk of environmental liability is especially heightened for farms that operate livestock operations that have manure lagoons. If a manure lagoon floods or otherwise discharges manure into the environment, the DXP01694 —UN—28JUL10 farm can be exposed to costly cleanup and restitution fees. The farm could also be exposed to fines from local, state, and federal governmental agencies. Another area of particular concern for real property is grain storage silos or bins. These structures are particularly dangerous. Each year people are killed in grain bin accidents. Anytime there is a loss of life, the owner of Fig. 11 — Buildings and land present liability risks the property is exposed to potentially millions of dollars in damages to the farm. Mobile Equipment Tractors, automobiles, ATVs, and other mobile equipment on farms also pose a liability risk to farms. Much like with real property, these vehicles can injure people when they are in use. As such, farm managers must be cognizant of the liability exposure they face when using this type DXP03633 —UN—11APR12 of equipment. Liabilities from Activities Liabilities from activities refers to any liability that arises directly from the operations of the farm. The most likely source of a major and devastating liability claim against a farm comes mostly from product liability claims related to the consumption of the farm’s products. This risk is most Fig. 12 — Silos and grain bins are particularly dangerous prevalent in farming operations that sell products directly to consumers. If a customer contracts a foodborne illness satisfied with the amount of waste from the combine, the from the consumption of a farm’s produce, the farm could neighbor could sue the combine operator for any losses be financially devastated. This effect is compounded sustained. When conducting the risk audit, managers by the fact that often when a foodborne illness event must be certain to include any custom work in which the occurs, multiple people contract the illness. Additionally, farm engages. foodborne illnesses often require significant hospital stays, and in some extreme cases are fatal. Calculating Legal Liability Exposure Along with the risk of foodborne illness, other risks from When calculating legal liability exposure, it is important activities include drift from agricultural spraying and to consider the worst case scenario for a potential risk. agricultural runoff. Unfortunately, with the types of risks that arise from agricultural operations, this is often a fatal injury. In many In addition to the legal liability risks mentioned above, cases, the economic damages the farm will have to pay to many farms also engage in custom work for other farmers. the families of the deceased are in the millions of dollars. If a farm engages in these activities, managers should be To most farming operations this would be devastating. The aware that they are exposed to additional liability from potential for a farm to go bankrupt after an event like that performing this work. For example, if a custom farmer is quite high if the farm does not properly manage the risk. harvests a grain field for a neighbor and the owner is not Continued on next page OUO1023,00042C1 -19-10AUG17-8/15 11-8 090117 PN=183  Risk Management HUMAN RISK The last category of risk the USDA uses to categorize risk is human risk. Human risk is the risk to the persons who operate and own the farm. This can include things such as estate planning and other related issues, but for the purposes of a risk audit it is best to focus on the risk of injury or death to the people who work for and own the farm. Risk to Workers Agriculture has been called the most hazardous occupation in the United States. As such, safety on the farm must be maintained at all times. The equipment DXP05240 —UN—14JUL14 used in agriculture is very large and very dangerous. I grew up on a farm and have personally been run over by a piece of equipment. I can tell you for a fact that it is not an experience you want anyone to go through. So when conducting a risk audit, it is important to look for any safety issues that may occur in the farm’s operations. Another area of particular concern is the use of farm Fig. 14 — Agriculture is a hazardous occupation chemicals. Many states and the federal government have guidelines for the safe handling of farm chemicals. Pesticides are deadly if not used properly. It is important to include these types of risks in your risk audit. It is the farm business manager’s job to ensure that the farming operation is run in a safe manner. Taking the time to find potential safety concerns will go a long way to ensuring the manager meets this goal. DXP05221 —UN—14JUL14 Fig. 15 — Include farm chemicals in your risk audit Continued on next page OUO1023,00042C1 -19-10AUG17-9/15 11-9 090117 PN=184  Risk Management In addition to the safety issues that farm employees and owners face, the issue of what will happen if the primary farm owner is incapacitated should be addressed. Unfortunately, people suffer illnesses and pass away. For farm families, this can be especially devastating if the primary farm operator becomes incapacitated in the DXP05236 —UN—14JUL14 middle of the crop year. No one wants to intentionally leave his or her family in dire financial straits during crop year without being there to work on the farm, but unfortunately this does happen. Discussing this risk is not pleasant, but it is important to have this conversation before anything happens. The peace of mind one gains from knowing that his or her family will be cared for if anything happens is Fig. 16 — Estate planning is an important risk management tool well worth a few moments of awkwardness. The exposure of human risk is quite substantial. If a farm step is to form an action plan for how to deal with, or treat, owner dies during the crop year, his or her family would be the risks. There are four primary methods of risk treatment: devastated financially if this risk is not treated. Also, if an employee is seriously hurt while at work, the farm would Risk avoidance not only have to find someone to do the work, but would Risk control also need to pay for the employee’s injuries. Human risk Risk retention can cause the farm to go bankrupt if not properly managed. Risk transfer RISK AUDIT RECAP RISK AVOIDANCE The risk audit is the important first step in developing a Risk avoidance is when a firm or individual avoids a risk risk management plan. Remember: in this stage it is exposure by completely disengaging in the activity from important to see what the farm is up against. At this point which the exposure arises. Risk avoidance as a method the most important thing is to list the risks and describe of treating risk is used only when the entity facing the the exposure. risk wishes to completely remove any exposure to the risk. For example, if a person wanted to avoid the risk PRIORITIZING RISKS of getting a speeding ticket, then that person would quit driving. The mere act of driving puts you at risk of getting The prioritizing stage is the next step in the risk a speeding ticket. So, if you want to make sure you will management process. In this stage, the farm business never get one, you have to stop driving forever. This is manager needs to prioritize the risks or categories of not practical for many situations. If a farmer wanted to risks mentioned above. The way to prioritize the risks is avoid the risk of losing his or her crop due to hail he or she based on the exposure calculated in the risk audit. It is would have to quit farming. What good does that do if the important to take care of the large risks that can cause the farmer wants to pass the farm on to future generations? firm to go bankrupt first. Remember: risk management is Always keep the ultimate goal of the farm in mind when about playing defense, and the most important aspect of considering how to treat risks. defense is neutralizing threats. CREATING A RISK MANAGEMENT PLAN After prioritizing the risks from most likely to cause bankruptcy to least likely to cause bankruptcy, the next Continued on next page OUO1023,00042C1 -19-10AUG17-10/15 11-10 090117 PN=185  Risk Management RISK CONTROL Risk control is when a firm or individual puts in safeguards to reduce the likelihood of a risk event occurring. For example, if a person wanted to control the risk of getting a speeding ticket, then that person would never exceed DXP02016 —UN—03FEB11 the speed limit. While this does not totally eliminate the risk of getting a speeding ticket, it does greatly reduce the risk of it occurring. Risk control is used every day by many firms in agriculture and non-agricultural industries. Power-take-off guards are a great example of risk control. By having guards on drive shafts, the risk of injury is greatly reduced. Another Fig. 17 — Risk control includes safeguards against emergencies example of risk control is non-slip shoes. Most restaurants require the cook staff and wait staff to wear slip resistant shoes to minimize the risk of employees slipping discussing retaining a risk, a manager does not have and being injured on the job. Fire extinguishers and to assume the entirety of a risk. In fact, this is very sprinkler systems, locked doors, steel-toed boots, and eye uncommon. For example, nearly all insurance policies protection are all examples of risk control. By incorporating have a deductible that must be met before the risk is these elements into a risk management plan you will be transferred to the insurer. This is retaining risk. The able to reduce the likelihood of a loss event occurring. insured has agreed to retain the risk up to the deductible, This will, over time, save the farm money and headaches. and the insurance company will then absorb the loss for any amount over the deductible up to the policy limit. RISK RETENTION Again, much like the deductible, the insured is also retaining risk for any losses that exceed the policy limit. Risk retention is when a person or business assumes some part of exposure to a particular risk. When OUO1023,00042C1 -19-10AUG17-11/15 RISK TRANSFER Risk transfer is the act of getting another entity to take on the risk of the firm. This is usually accomplished by purchasing an insurance policy. By purchasing an insurance policy, a farm is transferring the risk to the insurance company. Another way to look at the purchase of an insurance policy is that the farm is exchanging the uncertainty of an unknown catastrophic loss for the certainty of a smaller known loss in the form of an insurance premium. Insurance is a great way to manage risks when they are large and would bankrupt the firm. In exchange for the premium paid, the manager of the farm gets the certainty of knowing exactly how much will be lost if a loss event DXP05223 —UN—14JUL14 occurs. When the reduction of uncertainty is viewed through the lens of risk management, it is easy to see why insurance often plays a major role in a farm's risk management plan. Fig. 18 — Insurance is a common form of risk transfer Continued on next page OUO1023,00042C1 -19-10AUG17-12/15 11-11 090117 PN=186  Risk Management CHOOSING THE RIGHT METHOD OF TREATMENT When choosing the method of treatment for a risk, it is important to understand the goals of the farm owner. If the farm owner wants to continue certain practices, risk avoidance is not an option. However, if a particular practice is deemed too risky for the operation, then avoidance may be the best choice to eliminate the possibility of a risk event occurring. Controlling, retaining, and transferring risk all work in harmony with one another. It is often impossible or cost-prohibitive to transfer an DXP01800 —19—29SEP10 entire risk. This means that some level of risk retention is required. Also, controlling the risk is important because if you suffer a loss, the farm will have to pay for the portion of the risk that has been retained, and the farm’s insurance premium could be increased. So, by controlling the risk, the farm will reduce the possibility of a loss occurring, which in turn will keep the cost of managing the risk down. Fig. 19 — Keep goals in mind when choosing risk treatment methods In order to select the best method of treating a risk, a manager must first analyze the risk and then determine policy that falls into this category is disability insurance. if risk avoidance is an option. If it is, a manager may Disability insurance will pay for lost wages and other wish to cease the activity. If not, then he or she must expenses associated with being unable to work. This can find effective ways to control the risk, and then assess be of great help to farm owners that become unable to the amount of the risk the farm wishes to retain and the work during the crop year. amount of the risk that can be transferred. This may seem like a lot at this point. However, this chapter provides Property and Casualty Insurance some common risk management plans for selected risks This category of insurance also consists of two major that demonstrate how to properly assess and choose risk types: property insurance, and casualty insurance. management techniques for dealing with risks. Property insurance pays for an insured’s losses arising INSURANCE BASICS from damages or destruction of property. As insurance is an important aspect of a risk management Casualty insurance, also called liability insurance, pays plan, it is important to know some basics of insurance. for legal liabilities that arise from the insured’s activities. Insurance is a contract between two parties: the insured, and the insurer. The insured pays the insurer a sum Property and casualty insurance policies are often sold of money (a premium) to assume the risk of loss for together as package policies; one policy that covers both them. There are two basic categories of insurance: life property risk and liability risk. and health insurance, and property and casualty insurance. Insurance policies often have exclusions: perils that are not covered. For example, most insurance policies Life and health insurance is associated with the risks of exclude environmental liability. This means that if an death or illness to individuals and their families. Property insured has an environmental liability claim, this will not and casualty insurance is associated with the risk of be covered by the insured’s insurer. It is important to losses from property damage and legal liability. Both compare exclusions in insurance policies when shopping of these types of insurance play an important role in a for insurance. Just because two policies have the same comprehensive risk management plan. price, they may not offer the same coverage. Life and Health Insurance In addition to exclusions, insurance companies also offer endorsements on the policies they sell. An endorsement This category of insurance consists of two major types: is an additional line of coverage. For example, many life insurance, and health insurance. auto insurance providers offer an uninsured motorist Life insurance is an insurance policy that pays the family endorsement to their auto insurance policies. This of someone who has passed away a death benefit that allows managers to add additional coverages to a farm’s can be used to pay for final expenses and provide for insurance policy without having to buy a totally different the future financial stability of the family. This is a very policy. Endorsements are often a cost-effective way important policy for farm families to have in place to to transfer additional risk. It is important to be mindful protect the family in the event of an untimely death. of endorsements and exclusions when shopping for insurance for one’s personal protection or a business. Health insurance is an insurance policy that pays for the insured’s medical bills. Another type of insurance Continued on next page OUO1023,00042C1 -19-10AUG17-13/15 11-12 090117 PN=187  Risk Management should first implement the control methods he or she has IMPLEMENTING A RISK MANAGEMENT PLAN devised for treating the risk. Second, the manager should The fourth step of the risk management process is to ensure the proper funds are in place to cover the amount of implement the risk management plan that has been the risk that has been retained. Lastly, the manager should created for a given risk. In order to do so, a manager purchase the insurance to transfer the risk if necessary. OUO1023,00042C1 -19-10AUG17-14/15 MONITORING The last step in the risk management process is to monitor the plan that has been implemented. In order to do this, a manager should periodically review how well control measures are working. Additionally, the manager should look to see if any claims are being filed against the company’s insurance policy and to see if any claims against the company are being paid from any retention funds. By following these steps, the manager can ensure DXP01793 —19—29SEP10 that the risk management plans that are in place are protecting the farm adequately. Fig. 20 — Monitor and adjust the risk management plan as needed OUO1023,00042C1 -19-10AUG17-15/15 THE IMPORTANCE OF UPDATING RISK changes are made. For example, if the acreage the farm MANAGEMENT PLANS operates changes, the risk management plan should reflect the change. There may need to be changes to Risk management plans are only as good as the the farm’s insurance policies to reflect the farm’s current information used to make them. As such, it is important operations. Failure to update a risk management plan can to update the risk management plan for a farm when any result in the farm suffering a loss that was easily avoidable. SP63763,3BAA20E -19-23JUL14-1/1 SAMPLE RISK MANAGEMENT PLANS FOR SELECTED RISKS SAMPLE RISK MANAGEMENT PLAN: MARKET RISK Risk to Firm Price of commodity falling below level of profitability Exposure Value of commodity produced Priority High Plan Avoidance—None DXP05275 —UN—22JUL14 Control Using a commodities broker to ensure that the process is completed correctly Transfer Method of transfer— Using hedging techniques set a price for the commodity that is above input costs prior to planting the commodity Retention None Implementation Record the sale of the commodity Monitoring Check with broker to ensure that all securities and options have been purchased or sold to meet the farm’s goal price Fig. 21 — Sample risk management plan: Market Risk Continued on next page SP63763,3BAA20F -19-24JUL14-1/2 11-13 090117 PN=188  Risk Management SAMPLE RISK MANAGEMENT PLAN: EMPLOYEE INJURY FROM CHEMICALS Risk to Firm Employee(s) injured by the improper use of chemical pesticides or herbicides Exposure In excess of $5 million per employee Priority High Plan Avoidance—None Control 1. Purchase proper equipment for handling chemicals 2. Train employees in proper methods for handling and using chemicals DXP05276 —UN—22JUL14 3. Purchase and put up signage describing proper chemical handling 4. Enforce handling rules and procedures 5. Regularly hold safety meetings on proper handling procedures Transfer Purchase workers’ compensation insurance Retention The deductible, if any, of the insurance policy Implementation Put the plan into action by following the control list and purchasing the insurance required Monitoring Periodically check employees to make certain all procedures are followed Fig. 22 — Sample risk management plan: Employee Injury From Chemicals SP63763,3BAA20F -19-24JUL14-2/2 11-14 090117 PN=189