How to minimize the risks
It’s not news that the business of farming is rife with risks. Opportunities to encounter the chance for loss of one sort or another abound. Production, marketing, finances and human resources all present challenges, as do legal matters and environmental concerns. For growers of ethnic crops and others selling directly to consumers, there are particular challenges, especially in marketing. Helping growers evaluate, analyze and minimize these risks is the business of Professor Michael Sciabarrasi, agricultural business management specialist with the University of New Hampshire Cooperative Extension.
A range of risks
In general, growers’ risks, the chance of something bad happening that interferes with making money, fall into three broad categories: unfavorable markets, disastrous events and missed opportunities. More specifically, growers’ risks tend to be associated with issues related to:
- Production—Risks due to adverse weather, crop disease, machinery failure or unavailability of necessary inputs.
- Marketing—Risks due to low product prices, lack of access to markets, missed sales opportunities, unanticipated costs associated with selling and unexpected increases in the cost of inputs due to market factors (supply and demand).
- Financial Matters—Risks due to inadequate profits, excessive loan obligations and payments, declining values of assets, inability to access additional capital and rising interest rates.
- Human Resources—Risks due to existing federal and state employment laws, employee availability, personal relationships, farm transfer, divorce, death or disability.
- Legal Issues—Risks attributable to production or marketing contracts, business agreements and liabilities.
- Environmental Concerns—Risks attributable to impure water, soil erosion or use of pesticides.
Bumps in marketing
Because of their relative newness to U.S. markets, ethnic crops present unique marketing risks and challenges. Today’s so-called ethnic crops are new arrivals to the marketplace, much as peppers and tomatoes were a century or two ago. Growers can help familiarize customers with their new-to-the-marketplace ethnic produce, and thereby increase demand for it by offering samples and printed recipes.
A significant part of the customer base for ethnic crops is likewise new. Customers may have come from such diverse areas as Somalia, China or Brazil, or they may be less recently arrived people whose countries of origin might include India, the Philippines, Laos, Mexico, Nigeria or Iran. Many newcomers to the U.S. are of Hispanic origin, but their food preferences may be different depending on the country or region of the country from which they originated. Hot peppers, for example, are common to many of the regional dishes of Mexico, but are as unknown in Puerto Rican cuisine as okra and collard greens are to food of the upper Midwest.
Markets for ethnic produce may shift as newly arrived customers settle or resettle to be near friends, relatives or job opportunities. Other marketing bumps may occur when the prices of inputs such as fuel or labor rise, and product prices likewise increase to cover them. Prices may also shift as demand for the product rises or falls in relation to supply.
Approaching risk management
“Managing risk begins with identifying it. Know the nature and the sources of everything that may present opportunities for loss in your farming business. What is the potential for negative impacts? Will negative impacts cause you to shut down? Think about reducing negative impacts and focus on factors you can control,” says Sciabarrasi.
Managing price risk
While this may be challenging when first contemplating growing a new crop such as ethnic vegetables, try to estimate your production costs. Based on production costs and market research, develop a marketing plan with realistic sales forecasts and target prices. One approach to managing price risk is spreading harvest and sales over the longest possible period. “Remember that when you sell is often strongly related to the price you receive,” says Sciabarrasi. One strategy is to store crops so they are available when other growers’ produce is not. Cooperative marketing with other farmers and marketers and sales contracts with buyers, such as restaurants, may also ameliorate price risks. Also consider adding value to your products by delivering them or using them in recipes.
Managing market access risks
“To manage the risks involved in access to markets, you must first and foremost know your target market,” says Sciabarrasi. Who are your customers and what do they like about your product?
Then, you need to know your competitors. How are other growers of ethnic produce advertising? To whom and how are they selling? How do they offer and sell their produce?
To minimize market risks, utilize a variety of marketing channels. Spread marketing and sales of your ethnic crops among your farmstand, farmers’ markets, co-ops and other retail markets. Are there new, unique specialty products you can develop to add value to your crops?
A marketing co-op in conjunction with other growers or sellers of ethnic crops may also be helpful in spreading risks associated with access to markets.
Insuring against the risk of loss
Sciabarrasi strongly suggests that eligible growers consider insurance as another means of minimizing risks to their farming business. In many areas of the country, the United States Department of Agriculture’s Risk Management Agency offers a federally subsidized crop insurance program that covers such disasters as drought, hail, frost, hurricanes, excessive moisture, fire, insects, plant disease and wildlife damage. While not all crops are listed as insurable, growers of crops not on the list may be eligible to request crop insurance through a written agreement. Organically grown crops, for instance, may be covered under the written agreement provision of this plan. Pilot crops, however, are not eligible for coverage. Visit www.rma.usda.gov for specific information about crop insurance in your area.
While not an option for new growers, those with at least a five-year revenue history as reported on IRS 1040 Schedule F (or equivalent forms) may seek insurance through the United States Department of Agriculture Risk Management Agency’s AGR-Lite plan. AGR-Lite, which provides revenue protection for the whole farm and not just specific crops (thereby covering new ethnic crops), is available in certain designated counties of 35 states. The plan insures against revenue loss due to unavoidable natural occurrences and market fluctuations that cause a loss of revenue. USDA’s Risk Management Agency pays a portion of the premium for eligible producers. Growers can select from among several coverage levels and payment rates, which vary with the number of commodities produced. For detailed policies and forms, check out www.rma.usda.gov/policies/2010policy.html.
While not guaranteed, these strategies to manage the risk of growing ethnic crops, says Sciabarrasi, should help reduce variability in net farm income and ensure the income stability necessary to meet the financial obligations of your personal and business endeavors.
Kathleen Hatt is a freelance writer and a frequent contributor to Growing. She resides in Henniker, N.H.