Risk Audit

September 3, 2009 07:00 PM
 

lsmith@farmjournal.com

Farmers are inherently not risk averse; they deal with weather, pests and volatile markets yearly. Gregg Halverson is very aware of such risks, with 100 families in 10 states relying on him to make the right business decisions. He takes that responsibility seriously.
The president and CEO of Black Gold, a large potato production firm, makes the most of risk-management resources by separating risks into controllables and uncontrollables.

"We focus on things with the potential to put us out of business,” he explains. "Buying some forms of insurance is automatic; others are optional. We've chosen to be somewhere in the middle of the path.”

Riding at 100 mph. Halverson's approach is on point, says Purdue University ag economist Mike Boehlje. Twenty-first-century agriculture moves at high speed, and "if you don't have a solid risk plan today, it's like riding a motorcycle without a helmet.”

Boehlje is talking about dangers far beyond weather or prices. His list of sources of risk (at right) is longer than many farmers consciously consider.

"Virtually every decision you make can be assessed for risk,” Boehlje says—from the way you run your business down to seed choices.

Replication. Halverson's family has farmed in the Red River Valley of North Dakota since 1928, when his grandfather, A. E. "Hallie” Halverson, planted 10 acres of seed potatoes. Today, the business farms more than 16,000 acres.

The driving force for each of the 10 locations was a customer who urged Halverson to replicate his business there. He notes, though, that it mitigates weather risk. "If hail damages the Indiana crop, we rely on unaffected areas to offset lost income and satisfy our customers.

"We also irrigate 90% of our fields and use integrated pest management to control insects and disease,” he says, noting they have an agronomist at each location. Crop insurance plays a role as well.

As Halverson began operating multiple locations, he realized the need to protect the brand by developing and adhering to quality-control and standard operating procedures. When the company enters a new location, Halverson brings in managers from existing operations to train the new team.

Black Gold also has personnel to avoid technical failure, whether it is a mechanic in the field at harvest or a full-time IT person in the office.

All records are backed up regularly. Measures against hackers and viruses are tested and updated regularly.

Market Risks. With a focus on one crop, Black Gold also is vulnerable to market risks. "Who would have thought a guy named Atkins would remove potatoes from so many plates?” Halverson says, shaking his head. "That diet came out of left field.”

Black Gold minimizes risk of lost demand in one segment by raising potatoes for multiple markets: chips, table-stock and seed.

Business Strategy.
In the bigger picture, Black Gold management strategizes at least annually. "Rapid growth raises risk,” Halverson says. "If you make mistakes, they can be magnified. And larger cash needs limit credit sources to those large enough to service your needs—so you need strong relationships.”

Multiyear contracts for potato sales and the land leases are crucial, Halverson says. "The relationship with buyers is so important. We make sure to get to know multiple people in purchasing departments. On the input side, we buy inputs locally, so our counterparty risk is spread among many companies.”

Now in his 50s, he adds, "My age and the business complexity make it imperative to have a process for who takes over if something happens to me. We have even shared the plan with some key customers.”

Most important is to keep abreast of your industry and its direction, Halverson says. "It's surprising how some don't understand the direction and assume a victim mentality.”

Consolidation in agriculture is an example of this. "You can fail at any size. You can also thrive at any. The answer to ‘what is the right size' may be different today than tomorrow,” he says. "And small changes can mean a lot. If you bump from average a tiny bit, it
can mean the difference between success and failure.”





Ferreting Out Risks

• Business Climate Competition, capital access, government policy, industry condition/volatility/profitability, new technology
• Tactical Performance Production, prices/market, legal/regulatory, relationships, technology, casualty
• Operational Procedures Capacity, business interruptions, work stoppages, standard operating procedures noncompliance, customer dissatisfaction
• Financial Management Interest rates, lender relationships, cash-flow/repayment, counterparty risk
• Leadership/Governance Exceeding managerial authority, ineffective performance assessment, inadequate succession planning, ineffective communication among personnel
• Integrity Supplier and buyer relationships, landowner relationships, illegal acts of employees
• Regulatory/Permit Compliance Worker safety, zoning and land use, environmental permits, chemical storage/handling
• Information Technology Software licenses, use of firewall/antivirus programs, data back-up, protocols/procedures
• Strategic Positioning Inappropriate growth strategy, inadequate staffing, misallocation of resources, inappropriate business portfolio, lack of innovation
—Mike Boehlje


Top Producer, September 2009

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