Sources of Risk

Compared to many agricultural crops, greenhouse or nursery crops offer the opportunity to produce a fair amount of income on small acreage. With this income potential, however, come sizable risks. Risk results from the inability to predict the future accurately. Sources of risks that may affect the growers income are production, marketing, financial, legal, environmental, and human resource risks. Production risk concerns variation in output arising from many uncontrollable events such as weather (wind, rain, hail, etc.) insects and pests, technical challenges, diseases, input quality and availability. Fire, theft, and other casualties are also sources of production risk. Marketing risk concerns price risk and the availability of markets. Price risk is related to the variability of the price of commodities or the price of inputs, and to unanticipated forces that lead to dramatic changes in retail and wholesale prices. Financial risk has three basic components: interest rate risk, liquidity, and solvency. Interest rate risk concerns the cost of short-term, intermediate, and long-term debts. Liquidity concerns the ability of a business to pay its cash obligations in a timely fashion. Solvency concerns protecting the equity in a greenhouse business at adequate levels. Financial risks interact with other risks. Legal and environmental risk results from changes in policies and regulations that affect greenhouse and nursery business. For example, changes in government rules regarding the use of pesticides, tax, trade, environmental, or credit policy may alter the cost of production. Human resources risks may result from events associated with greenhouse operators and their families, professional consultants, and employees (e.g., theft, accidents, death, divorce, injury, seasonal labor needs, or poor health of key personnel).

Responses to Production Risks Crop Insurance There are many types of federal crop insurance programs that offer a variety of insurance products to protect against yield and revenue risks: Multiple peril crop insurance (MPCI), crop revenue coverage (CRC), income protection (IP), revenue assurance (RA), group risk plan (GRP), group risk income protection (GRIP), crop-hail insurance, and adjusted gross revenue insurance (AGR). Business Diversification Diversification concerns producing combinations of crops whose production is not directly related under variations in weather. Growers may also diversify production practices or may disperse production geographically. Another form of crop diversification is planting different varieties that mature at different rates and perform differently under alternative weather conditions

Input Use Input use is a major production risk management practice. Insect and disease prevention and control are important inputs for all ornamental producers. Pest management strategies are necessary to minimize the risk of insects and disease. Irrigation system and type of equipment are also important inputs for nursery and greenhouse crop production. Having excess machinery will allow growers to extend the size and scope of their operations and gain economies of scale, but may increase overhead costs. Contract Production In some contracts (similar to ones used in the poultry industry) an outside company coordinates all aspects of the business from production to consumer (vertical integration). Production contracts usually detail inputs to be supplied by the contractor, the quality and quantity of commodity to be delivered, and the compensation to be paid to the grower. Evaluating New Technologies A new technology may lower input costs and improve environmental quality, or may lead to higher crop yields. You may choose low risk technologies; you may reduce the effects of yield risk through irrigation, pest management practices, and site and plant cultivars selection. Responses to Marketing Risks The increased variability of commodity prices has increased growers awareness of price risks and placed a premium on good marketing skills. Developing a marketing strategy or plan requires careful evaluation of the supply and demand for ornamental products and investigation of market alternatives. There are many marketing options which are available to the ornamental producer: wholesale market, marketing cooperatives, local retail, roadside stands, farmers markets, Internet and/or mail order, pick-your-own operations, and direct delivery. Vertical coordination and marketing contracts are becoming increasingly important in marketing. So is the strategy of spreading sales to reduce dependence on buyers or market segments. Responses to Financial Risks The preventive approach to managing financial risk is accurate, up-to-date financial records and financial analysis of key ratios and cash flow projections and statements. By using a financial analysis system, growers can be aware of the magnitude of emerging financial management problems so that they can react to them. Maintaining emergency lines of credit with lenders, delaying or reducing business and personal expenditures are responses to managing cash flow. Insurance is a financial response to risk, which provides a specialized source of liquidity. Pacing investments and limiting credit and leverage and accepting another job in addition to managing the greenhouse are financial responses to risk. The capital structures of your business or your debt management are likely to affect the risk exposure of your business and may force you to operate at sub-optimal levels leading to inefficiency. You also need to investigate how to spread depreciation, interest, taxes, insurance, rental or advertising costs that are fixed in the short run over several commodities.

Responses to Legal and Environmental Risk Two salient risks are tort liability and environmental regulations. Tort liability arises from civil law suits filed because of negligent or unintentional injury to property or people by the grower, employees, or family members in the course of the firms business activities. The general response to this risk is to carry general business liability insurance. Avoiding environmental risks in part is consistent with some of the production risk management practices. Accurate records should be kept on the applications of herbicides, pesticides, fertilizers, and water usage.