notes-15 - Farm Management Chapter 15 Managing Risk and...

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Farm Management Chapter 15 Managing Risk and Uncertainty
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farm management chapter 15 2 Chapter Outline Sources of Risk and Uncertainty Risk-Bearing Ability and Attitude Expectations and Variability Decision Making Under Risk Tools for Managing Risk
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farm management chapter 15 3 Chapter Objectives 1. To identify the sources of risk and uncertainty 2. To show how risk and uncertainty affect decision making 3. To discuss how attitude and financial stability affect risk 4. To illustrate ways to measure risk 5. To demonstrate methods to help make decisions under risky conditions 6. To discuss tools to reduce risk or control its effects
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farm management chapter 15 4 Sources of Risk and Uncertainty Production and technical risk Price and market risk Financial risk Legal risk Personal risk
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farm management chapter 15 5 Figure 15-1 Causes of insured crop losses
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farm management chapter 15 6 Risk Bearing Ability and Attitude Producers vary greatly in their willingness to take risks and in their abilities to survive any unfavorable outcomes of risky actions. The level of risk a business should accept is very much an individual decision.
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farm management chapter 15 7 Ability to Bear Risk Financial reserves play a big part in determining an operation’s risk bearing ability. Farms with a large amount of capital can withstand larger losses before becoming insolvent. Cash flow commitments also affect the ability to repay loans.
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farm management chapter 15 8 Willingness to Bear Risk Some producers refuse to take risks even though they have no debt and a strong cash flow. Age, equity, financial commitment, past financial experiences, the size of potential gains or losses, and other factors all influence the amount of risk producers are willing to bear.
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farm management chapter 15 9 Expectations and Variability When managers are uncertain about the future, they often use some type of average or “expected” values for yields, costs or prices. There is no assurance that the expected outcome will be the actual outcome, but decisions must be based on the best information possible.
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farm management chapter 15 10 Probabilities Probabilities are useful when forming expectations. The true probabilities for various outcomes are seldom known, but subjective probabilities can be derived from whatever information is available, plus experience and judgment of the individual.
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farm management chapter 15 11 Forming Expectations Most likely Averages Expert Opinions Futures Markets
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farm management chapter 15 12 Table 15-1 Using Probabilities to Form Expectations Possible Number of years wheat yields actual yield was (bu/acre) in this range Probability 0-14 1 5% 15-21 2 10% 22-28 5 25% 29-35 7 35% 36-42 4 20% 43-51 1 5% Total 20 100%
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farm management chapter 15 13 Table 15-2 Using Averages to Form an Expected Value beef cattle prices Average Year Annual Price Weight Price x Weight 5 years ago $72.30 0.10 7.23 4 years ago 69.60 0.15 10.44
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notes-15 - Farm Management Chapter 15 Managing Risk and...

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