Risk and Enterprise Mix

GRDC - Cam Nicholson

Type: Factsheet
Knowledge level: Intermediate

Farm Table says:

When we talk about risk most of us immediately think about the negative consequences if an action goes bad. However this is only one aspect of risk.

 

This fact sheet is produced by GRDC and Cam Nicholson and discusses risk and your enterprise mix.

When we talk about risk most of us immediately think about the negative consequences if an action goes wrong.

Dictionary definitions re-inforce this thinking. However this is only one aspect of risk. The word risk is derived from the Italian word risicare, which means ‘to dare’.

To manage risk effectively we need to understand both the downside (the potential harm from taking a risk) and also the upside (the opportunities that taking a risk can offer).

Risk is a natural and accepted part of farming.

There are many strategies farmers use to manage production risk. Diversification in crop and pasture type, enterprise mix, targeting multiple markets and property location are common strategies. So is managing input costs, especially when production and prices can be highly variable.

The key sections include:

  • understanding  risk
  • analysing risk
  • correlations
  • enterprise mix
  • cropping is usually more risky than livestock –  is usually true however, risk also includes an upside as well as a downside
  • identify big risks within an enterprise

In conclusion, there is no single way to manage production risk. Many ‘levers’ influence the ultimate risk profile of a business and it is up to the individuals in that business to determine and feel comfortable with a level of risk that matches the rewards they seek.

Having said this, managing risk requires making decisions. The type of analysis used in Grain and Graze provides a very useful platform to inform discussion and decisions around risk.

2017 - Australia - GRDC - Cam Nicholson
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