Growers have a lot to think about and manage

Risky Business

Growers have a lot to think about and manage

Demirjian’s agency has been serving growers in the San Joaquin and the Coachella valleys for close to 30 years. They provide insurance for assets from homes and outbuildings to vehicles and farm equipment, as well as workers’ comp and liability. Their crop insurance covers citrus, almonds, cotton, canning tomatoes, and wine and table grapes.

Below, Checking a field for pest problems. Pests and disease can ravage a crop-or blemish it enough to lower its value. Good growing practices such as soil management and disease control can prevent major losses.

Running any business involves risks, of course. The goal for growers is not to minimize theirs; it is to understand what they are, to choose the ones they’re willing to take in order to achieve their goals, and to minimize the ones that interfere with achieving their goals. Once they know the risks, they can plan for them.

Growers also choose their risk level, somewhere between low, which is safer but may generate too little profit, and high, which can generate higher profits but also has more chance of failure. Their choice is limited by their cash flow requirements. The larger the proportion that they need to pay for cash costs, taxes, loan repayment and family living expenses, the less risk they’re able to assume.


Keeping detailed records reduces risk without reducing potential profits because it allows growers to plan based on their own documented information.

Purchasing crop insurance reduces risk without also reducing potential profits by protecting growers against the loss of their crops or the loss of revenue due to a decline in prices. It also completes the cycle of managing risk, because in order to qualify for insurance, growers must have records that show that they’re already managing it.

Growers can avoid their first legal risk by ensuring that they have an appropriate business structure. Options include a sole proprietorship, partnership, limited partnership, limited liability company, corporation and trust.

The weather is an unavoidable risk. “It’s a huge gamble, and it affects all crops,” Demirjian says. Growers can hedge their bets by planting some short-season varieties and having sufficient irrigation.

Pests and disease can ravage a crop or blemish it enough to lower its value. Good growing practices, such as soil management and disease control, can prevent major losses.

Growers can diversify their crops to spread their risk regarding weather, pests and diseases, since different crops vary in their responses to heat, cold, drought and their resistance to pests and diseases.

According to a report for the USDA, its Risk Management Agency crop insurance program covers losses that are unavoidable and due to naturally occurring events, but not ones that are due to negligence or failure to follow good farming practices. For example, while disease is an insured risk, damage due to the insufficient or improper application of available disease control measures is not.

“They’re at everybody else’smercy,” says AudreyDemirjian, owner ofAudrey Demirjian InsuranceServices, Inc. in Bakersfield, Calif.”You might as well roll the dice in Las Vegas.”

Price variability is another risk growers face. Long before they can sell their crop, they’ve invested money in growing and harvesting it, Demirjian says. They have no control over the selling price, which may change after they’ve made the commitment to grow the crop.

Changes in laws, policies and regulations regarding agriculture in this country can occur at any time and may or may not be in growers’ favors.

In addition, developments in communications and transportation have globalized agricultural markets, and the weather and even the actions of governments around the world can affect crop prices here. While these developments have given American growers access to distant markets, they’ve also given distant growers access to U.S. markets.

Dr. Howard Roberts inspects buds on a young walnut tree. Paying attention to detail, from inspecting plants to keeping good records, is crucial in reducing risk for growers.

“For example, table grapes start arriving here in January from South America,” Demirjian says. “Susie Homemaker has grapes for five months, and then they arrive from Arizona. By May, when grapes are ripe in the Coachella Valley, she doesn’t want them.”

Diversification spreads growers’ risk in the marketplace. Another strategy is vertical integration, where growers contract to sell an entire crop to one processor. Vertical integration is also an opportunity to lower transaction costs and gain access to a guaranteed market and capital. On the other hand, the crop has to meet all the requirements of just one buyer.

There also is a risk that either the grower or the buyer will be unable to meet their financial obligations, or that they will have a different understanding of the terms of the contract or its potential financial impact. In addition, according to the USDA report, opportunistic behavior and unreliability of contracting partners appears to be increasing. It’s crucial that all involved understand the terms of the contract.

Improved technology is another mixed blessing. More efficient equipment, more effective herbicides and insecticides, petroleum-based fertilizers, and genetic engineering, which has created disease and drought-resistant crop varieties, all increase yields.

On the other hand, supply increases along with yield, and increased supply decreases market prices. Growers can pay heavily for improved technology, which can narrow their profit margin and increase their debt. However, if they don’t upgrade their equipment, new parts may not be available when they need them.

Technology certainly can save growers money, Demirjian says. For example, growers pay a steep price for water. A good irrigation system allows them to use water efficiently and effectively, so they don’t have to contend with runoff and all its associated problems, they need to do less weed control, and they end up with a higher-quality product.

Micro irrigation in California. A good irrigation system allows growers to use water efficiently and effectively, so they don’t have to contend with runoff and all its associated problems, they need to do less weed control-and they end up with a higher-quality product.

Growers always face financial risk. Although their current and future incomes are uncertain, they need a reliable cash flow to fulfill their farm’s obligations, such as cash input costs, tax payments, debt repayments on land and equipment and family living expenses. If they’ve borrowed money and interest rates rise, they could face cash flow difficulties. Even when the farm is 100 percent owner-financed, growers are still exposed to the possibility of losing equity or net worth.

Then there are the human resources risks, especially that there may not be sufficient labor for the harvest. Labor issues also have legal implications that growers should be aware of, including employer/employee rules and regulations.

The possibility of the death, injury, illness, resignation or retirement of a key person in the operation is a risk. It’s important for growers to have a will and an estate plan, and a succession plan if they intend to pass the operation to the next generation. They also should have a trust. Inheritance laws come into play here.

There are other legal risks facing growers as well.

Technology can save growers money, Demirjian says. This grower is using computer images for precision farming to manage crop production.

Tort liability is the risk of being sued by someone outside the operation. An example is, if an accident occurs because of the lack of safety procedures on the farm. Growers are liable for the negligent acts of their employees. According to the USDA report, tort liability has been increasing significantly.

“If growers are leasing ground to someone else, they need to obtain a certificate of insurance from the lessee and have themselves named on the policy,” Demirjian says. “And if they hire a custom harvester, they need to obtain a certificate of insurance both for their workers’ comp and for general liability.”

Statutory compliance includes tax reporting and payment obligations; wage, hour and safety requirements; compliance with nondiscrimination statutes and the termination of employees; the use of pesticides; and water and air quality.

Audrey Demirjian.

Growers should keep detailed records in case they need to prove that they’re in compliance with laws and regulations. For example, keeping receipts for the purchases of recommended pesticides and documenting when and how they were applied significantly decreases legal risks. Many record keeping and accounting software packages are commercially available.

Asset risks include theft, fire or other loss or damage to equipment and buildings. Growers can cover this risk by buying asset insurance, but before they can do that they have to show that they’re paying attention to the details in their operation, Demirjian says.

“Growers have to have a clean operation, with few accidents and no thefts or fires. They have to have a list of their equipment, know where their equipment is and take care of it. And they have to hire good people who stay long term, because they know the equipment.

“We guide them to do all this every year,” she says. “Frankly, a lot of them forget because their job is to grow.”

The author is a freelance writer based in Altadena, Calif.