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Text Box: More years ago than I care to remember, an “entrepreneur” at a small town fair taught me a lesson in risk management. I was twenty– something, starting my first real job, and I had a new friend to impress. All I had to do to win the giant stuffed animal was to pick five even– numbered balls out of a drum: a 50-50 proposition. Picking the first ball would cost me 25 cents, the next one double at 50 cents, and so on. However, when I picked the fifth even-numbered ball, I’d not only win the prize, I’d get back all my money. Needless to say , if I fell short of the required five balls, there would be no refunds. “How could I possibly lose here?” I reasoned, and the hook was set. Twenty minutes later, I’d found only three even-numbered ball and “invested” more than $30 , a princely sum at the time. All my money was gone and I had to walk away without the prize, more than a little humbled. So what happened? I got caught trying to “play the game” without knowing the rules or thinking about the risks. My judgment may have been clouded by “youthful exuberance” (that’s my story and I’m sticking to it). Had I done a bit of simple arithmetic, here’s was I might have found: Since the balls were numbered consecutively and went back into the drum, drawing an even-numbered ball was a 50-50 chance, just like flipping a coin. On average it would take 10 tries to get the 5 even numbered balls I needed to win. While the 25 cent cost of picking the first ball was insignificant, doubling the cost each time makes the total add up quickly. If the average number of tries required were 10 , that tenth ball would have cost $128 and the total investment a whopping $225.75. I had only $30 ! I would Text Box: have needed more than 8 times that much to have a 50% chance of winning. If I had known a bit about risk management could this story have had a happier ending? I think so , and the same strategy applies to agricultural businesses. Risk management principles say that once you’ve identified a specific risk and understood what it means to your operation, there are four things you can do about it: Avoid the risk completely—choose another strategy, find another enterprise, grow another crop. Transfer the risk ( or part of it ) to someone else—buy insurance, take a position in the futures market, find a business partner. Mitigate, or reduce the risk—reduce your exposure by growing fewer acres, diversify into other kinds of crops or livestock to reduce debt. Accept the risk—carry on with the proposal as it stands. Remember that a positive word for risk is opportunity. In general, profits accrue to those who can bear the risks. Risk management won’t be the answer to all your problems nor will it guarantee a profit. However, it might help you look at your business from a different perspective: one based on evaluating and responding to risks as you identify them. Ted Darling Risk Management Specialist, AAFRD Text Box: A Lesson in Risk Management– Ted Darling Text Box: Volume 2,Issue 2 Text Box: Page # Text Box: Inside This Issue:

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President’s Message

1

ECAFA Value Added Tour

1

Ag– Fieldman’s Message

 

2

Variety Demo Plot

2

Watering Systems

2

A word from Agnes

 

3

Adding value to Forages

4

Risk Management

5

ECAFA

6