It started as a handshake. One of our customers, a cattleman, hired someone to background his cattle on the strength of a handshake. That deal lasted 20 years. But when the backgrounder went into bankruptcy, our client’s cattle were sold two to three times and our client lost $600,000.
He survived because of his remarkable attitude and management, but the lesson is an important one: third-party risk is real, and in many cases, it can’t be avoided. The challenge is mitigating it.
Your business is set to a well-timed choreography of supplies and services. One missed beat—a vendor that suddenly ceases shipments or a compliance snag—can seriously impact your farm’s productivity, financials and even reputation.
Know more about the third parties you work with or you might get more headaches than you bargained for. The list of companies tripped up due to misconduct committed by their third parties is long. In fact, try recalling a big corruption scandal that did not involve a company’s third parties.
Vendors are an integral part of a farm business, so you need the right risk assessment procedures in place.
For years, we’ve recommended you establish long-term relationships with suppliers, rather than the often common practice of saying, “Give me the best price or I walk.” They can work in your favor and help mitigate third-party risk. For example, another one of our clients and an independent fuel supplier both wanted a long-term business relationship. They signed confidentiality agreements and shared financials. The result? A long-term business deal that is a win/win, with peace of mind for both parties.
The following are some areas where third-party risk might be lurking on your operation and suggestions on ways to manage it:
1. Late payments. You need to be aware of the risk of delivering grain with a later payment. This might save on income taxes, but if you don’t get paid, you lose much more.
2. Early payments. Prepaying for some products for tax management purposes can be a good practice. But if they aren’t delivered, or applied on the farm, there is supplier risk. The most practical way to mitigate this risk is to conduct normal due diligence. If that doesn’t work and you lose money due to third-party risk, at least maintain adequate working capital so you can absorb any of the shocks this can bring.
3. Cashiers checks. You might think cashiers checks are a way to mitigate third-party risk. But I know of a time when a cashiers check was written by a fake bank. The lesson? A call to the institution on the front of the check can save you a world of hurt later.
4. Activist litigation. Producers can be targets for environmental and nuisance lawsuits. Keeping good records and having a public relations plan can deter these types of activities, but there is no way to eliminate all of the risk.
5. Agroterrorism. Security measures are important for disease control and might need to be reviewed to help eliminate other concerns, such as intrusion by activists. A review of procedures and equipment to keep activists from gaining access to facilities is important in this environment.
6. Basic safety procedures. While we’re going over the risks associated with doing business with others, remember some of the most important safety tips begin at your farm gate. Having standard operating procedures in place and providing extensive safety training on the farm is critical for all employees and managers.