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02 Nov, 2021

What’s your farm’s risk profile?

With major changes on the horizon, understanding your farm’s risk profile is vital says Philip O'Connor, Head of Farm Support at ifac.

CAP reform, sustainability and measures to address climate change will shape the future of Irish farming for years to come. Yet, although the broad context of these developments is well known, individual farmers have yet to see the finer detail of how future measures will impact their day- to-day business and income.

Questions farmers will need to consider are likely to include:

  • How will the new Basic Income Support for Sustainability (BISS) affect your farm income?

  • Will you need to cut stock numbers or find more land?

  • Will you need to upgrade or build additional slurry storage?

To answer these questions, it is important to have a good understanding of your farm’s business fundamentals so that you can evaluate risks, identify and address potential problems and take advantage of opportunities.

So, what is your farm’s risk profile?

Risk profile

Every business faces risks, some of which (such as regulatory or global market risk) are outside of the control of individual business owners, but many risks can be managed if you identify them in time and take action to mitigate them.

The first step in risk management is to list the risks you face and grade them as either low, medium or high risk. You also need to analyse your farm’s strengths and weaknesses. If something is high risk and a weakness, you can then decide what action to take to reduce or eliminate the risk.

Set out below are 5 key headings to look at when identifying your strengths and weaknesses.

1. Physical Assets

Questions to ask under this heading include: How much land do you own / rent? What are the rental terms? What size is your grazing block? What are your overall and grazing block stocking rates? How many litres / solids are you producing? How old are your buildings? Will any buildings need to replaced or upgraded in next 2–5 years? If you have a lot of rented land, how secure is this? What term is left on leases? If your stocking rates are very high how would you reduce them? Does your farm need significant capital investment? If so when?

2. Wealth

Review your balance sheet to assess your net worth (wealth). Your net worth is all of the assets you own (land, buildings, machinery, deposits, cash, stock investments, etc) less all of your liabilities (loans, money owned to merchants, overdraft, etc). Your balance sheet shows the overall financial strength or weakness of your business.

3. Liquidity

Is your business earning more than it is spending? Many businesses can be cash negative for a time, perhaps due to one-off purchases or capital investment, however every business needs to pay its way in the medium to longer term. What are your loan commitments? Your average drawings? Taxes due? How much cash does your farm need to operate day-to-day, pay your staff, service loan repayments, pay your tax and provide an income for yourself? How exposed is your farm to a drop in commodity prices or a rise in key input costs?

4. Profitability

To meet your financial obligations and provide an income for you and your family, it is essential that your farm is profitable. KPI (keep performance indicators) identify your farm’s breakeven point and highlight important numbers to monitor such as the minimum price per litre your farm can sustain. Benchmarking your KPIs against your peers will reveal opportunities to improve profitability.

5. Physical Performance

Examine your grass growth, herd fertility, 6 week calving interval, EBI, and animal health. How are they performing? Are they increasing? Decreasing? On par with industry averages? Are there opportunities to improve?

What are my next steps?

It is likely that you will require assistance when preparing your risk profile and identifying the actions that you need to take. We recommend that you work with your accountant and agricultural advisor so that you can set appropriate personal, financial and farming goals and targets. This will provide a firm basis on which to plan for the future and enable you both to manage potential problems and to grab opportunities when they arise.