WSU Cooperative Extension
210 W. Broadway
Ritzville, WA 99169

Phone: (509)659-3215
FAX: (509)659-3303

Questions about PNW Risk Management Project? Send us mail!
PNW Project Coordinator

Managing Your Farm's Financial Risk Presentation

Public & Private Partnership Understanding Agriculture's Risk
Funded by: USDA Risk Management Education Initiative
Cooperative State Research Education and Extension Service
USDA Risk Management Agency
Commodity Futures Trading Commission
USDA Office of Outreach

Learning materials and decision tools for Agricultural Risk Management:
Managing Financial, Production, and Price Risk.

"Available to Download"

Chapter 7

Table of Contents

1. Instructor Guidelines

2. Introduction

3. Financial Risk: Definition and Sources

4. Managing Financial Risk

5. Managing Credit Reserves

6. Managing Liquid Reserves

7. Interest Rate Plans

8. Structuring the Repayment Term of Debt

9. Lease Terms and Risk

10. References

11. Exercise: Analysis of Investment in Grain Storage Facility

The objective of this chapter, Managing Your Farm’s Financial Risk, is to provide specific strategies for managing financial risk faced by the farm business. The chapter focuses primarily on credit, investment and cash reserve/liquidity issues.

The chapter starts by establishing a definition for financial risk and identifies the primary sources of farm financial risk. Next, the chapter covers the relationships between debt, leverage, profitability, and risk. Managing credit, understanding liquidity, restructuring debt, and relating interest and principal to the risk position of the farm are covered. Additional materials are provided on restructuring debt and the impact of lease arrangements on the farm’s financial position.

Each topic is developed first by definition, by presentation of examples, discussion of strategies to improve the issue under discussion, and finally by providing measures that the farm operator can use to determine whether corrective action is needed. The partial budget, a tool for evaluating potential investments and changes in farm enterprises, is described, and examples are provided using the partial budget. Finally an exercise is provided using the partial budget to analyze a potential investment in a grain storage facility. It is recommended that this chapter be presented following the chapter on Assessing Your Farm’s Risk Bearing Capacity.