AM8
Agriculture Management, Economics, & SalesOverview of Risk Management
Unit: Agribusiness Management
Lesson Title: Overview of Risk Management
Standards ABS.07.04.01.a. Determine the meaning and importance of risk and uncertainty with AFNR enterprises.ABS.07.04.01.b. Describe alternative approaches to reducing risk, including the use of insurance for product liability, property, production or income loss, and for personal life and health.ABS.07.04.01.c. Prepare a comprehensive risk management plan and contingency plan for an AFNR business.
CCSS.ELA-Literacy.W.11-12.7 Conduct short as well as more sustained research projects to answer a question (including a self-generated question) or solve a problem; narrow or broaden the inquiry when appropriate; synthesize multiple sources on the subject, demonstrating understanding of the subject under investigation.CCSS.ELA-Literacy.SL.11-12.4 Present information, findings, and supporting evidence, conveying a clear and distinct perspective, such that listeners can follow the line of reasoning, alternative or opposing perspectives are addressed, and the organization, development, substance, and style are appropriate to purpose, audience, and a range of formal and informal tasks.
Student Learning Objectives
Slide 2 in Overview of Risk Management Lesson ObjectiveAfter completing the lesson on an overview of risk management, students will demonstrate their ability to apply the concept in real-world situations by obtaining a minimum score of 80% on a Risk Management Survey.
Enabling ObjectivesAs a result of this lesson, the student will…
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1. Use a risk management assessment tool in examining a personal decision.2. Examine a business’s current issue or dilemma and use the Risk Management Model to
develop a solution to lower the risk.3. Indicate five ways agribusinesses can reduce risk.
Time: Approximately 180 minutes
List of ResourcesBacon K., Boren N., Kirkwood V., Birkenholz R., Plain R., Rohrbach N.
(1988). Agriculture Management and Economics Instructor Guide. Columbia, MO: Instructional Materials Laboratory.
Bacon K., Boren N., Kirkwood V., Birkenholz R., Plain R., Rohrbach N. (1988). Agriculture Management and Economics Student Reference Guide. Columbia, MO: Instructional Materials Laboratory.
Crouhy, M., Galai, D., Mark, R. (2006). The Essentials of Risk Management. New York, NY: McGraw-Hill Companies, Inc.
Missouri Center for Career Education. (2006). Missouri Personal Finance Curriculum. Retrieved from http://www.missouricareereducation.org/doc/persfin/persfin.pdf.
Personal Finance, 5th Ed - Jack R. Kapoor, Les R. Diabay, Robert J. Hughes - Irwin, McGraw-Hill Publishers - Copyright 1999.
List of Tools, Equipment, and SuppliesAM8 PowerPoint PresentationAM8 Activity Sheet and Evaluation PacketNote cards or small sheets of paper for review activity
Key TermsSlide 3 in Overview of Risk Management
The following terms are presented in this lesson (shown in bold italics):Risk Management
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Interest Approach: Use an interest approach that will prepare the students for the lesson. Teachers often develop approaches for their unique class and student situations. A possible approach is included here.
Slide 4 in Overview of Risk ManagementI Bet… Pose questions asking students, “How much do you bet me that ________________________?” Fill in the blank with things like “our basketball team will go to state,” “Mizzou will win a national championship in football,” “our Farm Management CDE team will make it to state,” etc.
Record statements on a PowerPoint slide or the whiteboard and keep track of the wagers. After going through five or six examples, have students examine the list of statements, noting those with large wagers and those with very small wagers. Facilitate a discussion on why wagers for some are large and why wagers for others are very small. Listen for students to conclude that the large wagers are for “sure bets” and considered a small risk. The ones with small wagers are probably for more risky situations.
Begin using the word “risk” throughout this discussion and have students refer to the level of uncertainty as “risk.”
Survey students for their opinions on their personal levels of risk and why they put themselves within that level.
Then have students complete AM8.1 to assess their personal investment risk. Total points when completed. Ask students to share what surprised them, what they predicted, etc. and tie to previous interest approach discussion
Conclude interest approach by summing up results and student discussion and introducing that we personally face risks every day, and as an agribusiness owner we will continue to face risks; however, these risks probably come with a little more challenge and a lot more reward than our personal examples discussed above.
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Summary of Content and Teaching Strategies
Objective 1: Use a risk management assessment tool in examining a personal decision.
Teaching Strategies Related Content1. Risk is present in all areas of life, and
risk management is a process we all must be engaged in. Whether you manage a business, are self-employed, or a consumer, all are exposed to various types of risk or future events which can have financial implications. The risk from this uncertainty in most circumstances can be managed.
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2. A business should complete an assessment of their risk management. Here are the steps:
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3. Let’s take a closer look at each step.
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Risk Management Identification, assessment, and
prioritization of both positive and negative risk
Risks come from uncertainty in financial markets, legal liabilities, production, project failures, credit risk, natural disaster, policy, human resource issues, and reputation risk
Risk Management Assessment1. Role and Responsibilities2. Identification of Risk3. Risk Assessment4. Risk Plan of Action5. Monitoring, Controls, and Reporting
Role and Responsibilities Select risk management team and
project manager Team identifies and develops plan of
action to identify risks of project, business segment, or company
May utilize outside resources to assist in risk identification and management
Identification of Risk Evaluate all risk components May include environmental factors,
organizational structure, scope, costs, and quality
Methods – Interviewing employees, customers, and peers; SWOT Analysis
Risk Assessment Use results from SWOT Analysis Develop assessment of range of risks
identified
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4. Facilitate a class discussion on why students think a risk management assessment would be beneficial for a business after learning about each of its pieces.
5. Apply this risk management assessment to students’ personal lives. Have them brainstorm some “ethical” dilemmas or personal decisions that involve risk. Record these on the
Prioritize risks by level of importance – Assign high, medium, or low to probability of risk component; Impact of risk to business
Risk Plan of Action Each major risk (high or medium)
should be assigned to an assigned party of monitoring and controlling purposes
Approaches for addressing major risk – Avoid – “High impact probability,” avoid if cause cannot be eliminated or mitigated; Mitigate – Medium to high categories, identify ways to reduce probability of impact; Accept – Do nothing, management willing to accept risk; Contingency – Require action plan to address risk; Transfer – Shift risk to third; Insurance policies, outsourcing processes, etc.
Monitoring, Controls, and Reporting Track, monitor, and control risk levels
in the business or specific project throughout the business project life
Assign risk owner(s) to track, monitor, control, and report on status and effectiveness of risk management action plan
“High Priority” list to be reviewed frequently
Ongoing document incorporated into annual business plan
Risk Management AssessmentAs with any business planning assessment process, the risk management process is a key tool used in successful businesses and is an ongoing process of identifying and managing risk.
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whiteboard. As pairs or small groups, have students select a dilemma or decision in which to apply the risk management assessment. Complete AM8.2 as students go through each step of the assessment. When pairs/small groups finish, have them present to other groups/pairs or to the class as a whole for discussion.
6. Now complete a risk management assessment individually using AM8.2. When students finish, have them partner up and share their thoughts and ideas. In a different color of ink, have the partner make notes or suggestions for improvement. Remind students there are not really any right or wrong answers, so suggestions should remain positive and constructive. Return AM8.3 to the original owner for them to make any last changes before handing in to the teacher for review.
Objective 2: Examine a business’s current issue or dilemma and use the Risk Management Model to develop a solution to lower the risk.
Teaching Strategies Related Content1. A risk management model identifies
risk components associated with most businesses. The risk components may not be weighted equally during the risk evaluation process; however, any one element can create a significant financial hardship on a business that could adversely impact viability of the business.
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2. Let’s take a look at each piece of this Risk Management Model.
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Risk Management Model Production Market Financial Legal Human Resources Environmental Policy Reputation Black Swan Events
Production Risks associated with components
related to production Technology Natural Disasters Production Quality
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Contractual Equipment Obsolesce or Inefficiencies Counterparty Risk Scope of Production
Market Risks associated with market
relationships of a business Price Supply and Demand Counterparty Production Quality Value of the Dollar
Financial Risk associated with financial
relationships of a business Capital – Is capital adequate to sustain
ongoing business operations? Does capital meet lender financial requirements for borrowing needs? Does the operation have sufficient capital to maintain business operations, replacement, or support expansion plans?
Availability of Capital – Are reliable sources available? Are borrowed funds structured to meet the business capital and operating needs? Are repayment terms for borrowed capital matched to the business cash flow?
Quality of Financials – Are financials Fiscal or Calendar Year and accountant prepared or internal? Market or cost basis statements? Are financial and earnings statements of sufficient quality and adequacy to meet business and lender needs? Cash or accrual earnings statement?
Sustainable Growth and Debt Levels – Are current or proposed business growth and debt expansion plans sustainable?
Counter Party – Measures risk exposure and concentration of business relationships in the event of failure of another business which could result in
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loss or partial loss of business assets or impairment of capital resources; Supplies, elevators or other buyers of products, goods or services, deferred payments, etc., lenders, accounts receivable
Legal Business Structure Taxes – Deferred taxes, estate taxes,
franchise, earnings, and others Contractual Arrangements – Issues
arising from simple cash rent agreement, purchase agreement, promissory notes, real estate contracts, production contracts, etc.
Tort Liability Statutory Compliance Environmental
Human Resources Labor – Resource allocation and labor
management Employees – Training, benefits,
retirement, etc. Divorce – Impact on business owners Death – Succession planning Disagreements – Labor, business
owners, etc.
Environmental Discharges – CAFO’s Hazardous Materials – Fuel, chemical,
fertilizer, and other materials Airborne – Nuisance Contamination – GMO, processing, etc.
Policy Risk associated with government
programs, policy, or procedures Government Payments or Subsidies –
Direct payments, Sure, cotton, peanuts, Biofuel, and others
Monetary Policy – Impact of US treasury on interest rates, value of dollar, and relationship on exports
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3. Facilitate a discussion on students’ thoughts as to why this risk management model would be a positive addition to any agribusiness based upon what we have just learned about each piece.
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4. Conduct an Internet or newspaper search for current headlines pertaining to businesses and issues or dilemmas they are facing. Some examples might be Carnival Cruise Lines – recent
Reputation Strength of a business is no greater than
its weakest link Whether issues arise through
production, processes, marketing price, or customer service, with each customer touch, the “business reputation” is at risk
Can greatly be affected by social media Production Quality Customer Service Competitive Pricing External Image or Branding External and Internal Communications Employee Knowledge of Products and
Services Human Resources
Black Swan Events Events which meet the following
criteria: 1) An event of surprise or rare event; 2) Carries extreme impact; 3) Events which are not predictable but in retrospect, determined the event(s) could have been anticipated
Acts of Terrorism (9-11-01) Stock Market Crash (1987) Financial Collapse of 2008
Risk Management Model Risk Management Model can be used
across multiple business segments when assessing risk. Not all components of the model may apply to each situation, yet some components can be found in multiple segments. As with any business planning model, the Risk Management Model can be used at any time during the business cycle to assist in identifying risk areas for the Risk Management and Planning Assessment Model.
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mishaps with missing passengers, ship incidents, etc.; Computer/cell phone company issues – Apple, Microsoft, AT&T, etc.; Retail store/company issues – JCPenney, Kohl’s, Target, Walmart, etc.; Environmental company issues. Also, search local newspapers for school issues, small business issues, etc. Teachers should approve selected articles before student pairs or triads complete AM8.4.
5. When pairs or triads are finished, share AM8.4 with the class to discuss, make clarifications, and answer questions.
6. Students will individually complete AM8.5 and submit for peer review. Peers will make comments and/or suggestions for change or modification. Student author will make final changes before handing in for teacher review.
Objective 3: Indicate five ways agribusinesses can reduce risk.
Teaching Strategies Related Content1. Ask students, “As business owners,
how might we reduce risk for our businesses?”
Reducing risk in agribusiness Insurance Diversification Price Protection Production Contracting Rental or Leasing Agreements
Insurance Agreement between the insured and the
insurance company Company provides financial protection
in return for regular payments by the insured
Diversification Provides optional methods of income Makes income more even Still necessitates one main source of
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income equaling 40% - 60% of income
Price Protection Forward contracting – Contracting to
buy or sell a specific amount of a commodity or input for a specific price for a specific time in the future
Hedging – Using the futures market to transfer risk
Options – Paying a premium to have the option of being guaranteed a specific price in the future
Production Contracting Producer contracts with a purchaser to
raise a certain quality and quantity of product
Purchaser furnishes many of the production inputs
Producer is paid a certain amount for each unit produced
Rental or Leasing Agreements Transfers risk of obsolescence to lessor Transfers risk of high replacement costs
to lessor Transfers risk of maintenance and
repair expenses to lessor
Review/SummarySlide 24 in Overview of Risk Management
Risk management is an important aspect of any business. If the owner or manager of an agricultural business does not manage risk, the life of the business may be short. Following a risk management model can help business owners identify, assess, and prioritize risk. There are several methods for reducing risk such as insurance, diversification, price protection strategies, production contracting, and rental or leasing agreements.
Review: I Bet…: Return to “I bet…” statements used in interest approach and personal investment survey. Have students consider how their answers/bets would change if they were business owners whose livelihood depended upon the profits and success of their business. Facilitate a class discussion on the statements above and how students as business owners would use the risk management assessment and model to elude business risk.
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Slide 25 in Overview of Risk ManagementExit cards: Students will answer the following questions on a note card or small slip of paper and hand to teacher as they exit:
What did you learn today about risk management? What questions do you still have about risk management?
Application
Extended ActivitiesBrainstorm potential new activities for the local, area, district, and/or state FFA associations. Next, have students identify the risks involved with incorporating these new activities into the current FFA Program of Activities. Finally, discuss how students would use a risk management model and/or assessment tool to elude or lessen the identified risks.
Devise five new ideas to implement in students’ Supervised Agricultural Experience Programs. Use the Risk Management Assessment tool and Risk Management Model to assess the risk level and identify actions students can take and/or implement to lessen the identified risks. Share results with teacher during next SAE visit.
Invite a panel of local business owners to class to discuss how risk management affects personal business decisions made daily, monthly, yearly, long-term, etc.
EvaluationRisk Management Survey AM8.6
Alternate - Paper-pencil Quiz Evaluation AM8.7
Answers to EvaluationEvaluation AM8.6Answers will vary. Use scoring guide on AM8.6 to assess student work.
Alternate Evaluation AM8.71. Insurance - Company provides financial protection in return for regular payments by the
insured2. Diversification – Provides optional methods of income3. Price Protection – Forward contracting, hedging, or options4. Production Contracting – Producer contracts with a purchaser to raise a certain quality
and quantity of product5. Rental or Leasing Agreements – Transfers risk of obsolescence to lessor, transfers risk of
high replacement costs to lessor, transfers risk of maintenance and repair expenses to
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