What is risk management? And what does it mean to your business?

"Just about everything you do in your business means you are managing risk," says Ellen McAdam, a partner in McDougal Orchards, Springvale, Maine. Ellen is an apple and tree fruit producer, and co-owner of several creative direct marketing enterprises, such as a cross-country skiing venture.

What is risk management?
Risk is any uncertainty that threatens your operation’s ability to accomplish its goals.

Risk management is about managing resources wisely; protecting yourself, your employees and your customers from harm; and safeguarding your assets.

“It takes less time to do a thing right than it does to explain why you did it wrong”
— Henry Wadsworth Longfellow

If you ever wonder whether risk management has value for your business, just imagine for a moment working for the Park Service in Los Alamos, N.M. and the shock of discovering that the "forest-restoration fire" you helped start was burning out of control. Now, imagine the even worse shock that the fire wiped out hundreds of homes, and that a better risk-management strategy may have prevented the fire from raging out of control in the first place.

While it is impossible to anticipate every possible risk that may confront your business, you can take steps to help minimize their impact.

Risk takers with a twist
Ellen McAdam knows that while direct marketing allows her family to receive a higher return for their produce and more control over prices, it also has drawbacks, such as insurance liability and customer service issues.

Ellen and her father Bob McDougal own McDougal Orchards, and Ellen’s brother, Evan McDougal, runs several of the farm’s new ventures. The McDougal family has worked with farming’s inherent risks ever since Great Great Great Grandfather Joshua Hanson bought the land for "fifty-two pounds ten shillings" in 1779. More recently, Bob started the area’s first "pick-your-own" (PYO) operation in 1974, after a hailstorm destroyed any hope of a wholesale crop.

Today, the family continues to test new enterprises in order to compete in the highly competitive global apple market. The operation covers 27 scenic acres of dwarf and semidwarf apple orchards, two acres of traditional trees, several acres of other tree fruits (nectarines, pears, plums, peaches, cherries), and several more acres of sweet corn, pumpkins and fall specialty items like Indian corn, gourds and winter squash.

Their PYO business has a farm animal exhibit and a hayride to attract families and school groups. Tourists from close-by beaches and lakes populate their roadside market in late summer and fall, and young couples and grandparents bring children for family outings "on the farm." Less than one mile from Main Street in Sanford, their 10 miles of carefully groomed cross-country ski trails draw local workers on their lunch hour, and families and tourists on weekends.

Here’s the twist. The McDougals consider themselves fiscal and safety conservatives, even though their business involves taking risks every day. This makes them natural risk managers.

Financial risk
"We run our operation as a business, and expect our pick-your-own operation, tree farming and cross-country skiing ventures to make money," Ellen says. "We expect our farm animal display and hayrides to pay for themselves. We sell food for children to feed to the animals, and we will probably charge for hayrides, which we expect to start this fall. We are careful about waste, and crush apples for cider that we sell right at the farm stand, and leave some apples on the tree, which means no associated harvesting costs. We don’t carry a lot of debt. Just our Farm Credit of Maine line of credit to fall back on for operating funds.

"Our cross-country ski venture has great potential, and some risk — Southern Maine’s inconsistent snowfall. To overcome this barrier, we created a business with low overhead. We turned an old bunkhouse into a heated ski shack, and added a kitchen to sell hot cocoa and coffee. The ski business owes the apple business, but we owe no outside loans. We are not making money, yet, but we are not losing money either."

Safety risks
Safety plays an important role on the farm — from safety training for new hires to restricting which animal children can feed in their farm animal exhibit.

"We don’t have a petting zoo," Ellen is very quick to point out. "Instead we have an educational farm animal exhibit. Visitors can feed the gentle animals, such as the goats, but a sign warns about not feeding "Thanksgiving" and "Christmas," our turkeys, because they may peck at little hands."

Ellen knows that children tend to look at farm animals as something to pet. Consequently, she takes precautions to keep the public (especially children) away from animals that may present dangers. She knows that responsibility for such injuries can be absolute.

Ellen says that they are always looking for ways to prevent accidents. They carry cell phones when they check the trails for downed skiers, and worked out procedures on how to quickly transport an injured person from a trail to their local hospital.

They allow visitors to climb ladders and pick apples on just two acres of the orchard that still has big, old standard trees. "Some visitors really enjoy the nostalgia of the old trees," Ellen says. "So keeping an employee in the area is our biggest safety advantage. Our crews also pick apples from tops of trees, so visitors are not tempted to stretch for that ‘perfect’ apple on the top branch. And with our dwarf and semidwarf trees less than 10 feet tall, visitors have an ample supple of fruit to pick while standing right on the ground."

Market risks
Ellen and her family are slowly weaning themselves away from selling their harvest through a broker, because they enjoy higher prices for their produce that they sell directly to consumers. "In 1999, we harvested 14,000 bushels of apples, and sold 40 percent from our farm stand, to our local grocery chain or to other farm stands," she said.

The farm has diversified into other tree fruit, such as nectarines, plums and pears, and maintains a wide variety of apple trees. "We want to amaze customers by our selection, from the ever-popular Macintosh to new varieties like Royal Court. We display more apples than we sell on the farm because customers want abundance. They see lots of apples and fill bags with them."

Insurance
"Insurance is a safety net that’s as necessary to a farm business as good equipment or good land," Ellen says. "Direct marketing would be tremendously risky without it. Just one person can twist an ankle, think that the injury is your fault, and put you out of business. It’s a scary thought."

Ellen and her family carry a $1 million umbrella liability policy beyond their farm policy for extraordinary events on the farm, animals and PYO operation. In addition, Ellen bought a separate liability policy for cross-country skiing, and will add insurance for the hayride. Ellen says that they increased their crop insurance this year, "It’s such a bargain now that it covers quality issues." They also carry hail insurance.

Clearly Ellen does not think about insurance every day. "But," she says, "I do discuss safety and risk issues with our insurance agent whenever we consider a new venture. For example, I asked for his suggestions on assembling our new hay wagon, to make sure that we get it right. And before we built our new ski shed, we spoke with town and state agencies about permits, licenses, inspections. That way we were ready when the inspectors stopped by."

A Winery Sounds Romantic, But …

Esther Earle and her husband, John, had a dream of opening their own business. To realize their dream, they worked diligently as part-time farmers for 13 years raising bees for honey and pollination of fruit and vegetables. Then one day they started making mead, or honey wine, and before they knew it, they were making 4,000 gallons a year.

Today they are partners in Earle Estates Winery-Meadery, a farm winery that the couple started in 1993, and in Torrey Ridge Winery, a beautiful new tasting room, gift shop and winery that they just opened in September 1999. Their son, Marty, manages the Earle Estate Tasting Room and his wife, Jody, works part time for the business.

Earle Estates Meadery, one of three in New York State, received the first approved variance to produce honey mead under a modern day process, which creates a delightfully refreshing beverage. They also produce traditional mead using their own formula and process the results in a bountiful elegant wine. In addition, they created grape wines and new blends of honey wines and fruit wines to attract a broader market.

"Location, location, location" is king for most direct marketing ventures. That’s why Esther says New York’s Seneca Lake Wine Trail (www.senecalakewine.com) was the clear choice for locating their new business. She adds, "Our market is whoever walks through our door, so we made our decision based on the more than one million people who visit the Seneca Lake Wine Trail each year."

Having one million prospective buyers is an obvious benefit of running a winery. But wineries, like other business, have many barriers to success. "The industry carries a romantic image, but it requires a lot of backbreaking labor to produce that beautiful clear liquid in the bottle, and it also has its own weather liabilities and complicated and difficult regulations."

Maintaining a constant supply of grapes to make wine is an ever-present concern. "If the weather is against us," Esther says, "our production could suffer. So we have a contingency plan. We have a three-year supply of honey in inventory and more wine than we can sell in a year. We’d look to Long Island for grapes if the Finger Lakes couldn’t supply us, and we maintain a reserve fund to help us withstand a bad year."

While the Earles may never need to fall back on their contingency plan, they feel more confident knowing what they would do if a disaster strikes.

As a former nurse who taught health industry regulations, Esther says the wine industry is burdened by demanding regulations, perhaps even more demanding than the health industry. The Seneca Lake Trail spans 26 wineries that support responsible drinking education, which is a frequently discussed topic at meetings of the trail association.

"We know if one of us has a problem, it will come back on us," she says. "We train our employees regularly on how to say ‘no’ to minors or people who’vet had too much to drink. We also carry liability insurance in case a customer drives out of our tasting room, gets into an accident and says it is our fault."

Stiff quality assurance
For Earle Estates Meadery, risk management also means stringent quality assurance standards. "Our goal is give our customers the highest quality product possible. That means we take extra steps throughout our entire production process to ensure we meet our own quality standards — from our bottle sterilization systems to our filtration systems and our labeling systems," she says. "We can’t be too careful that the wine is stable, the glass will not break and the bottle is attractive. We stress quality with our employees every single day."

Knowing the financial picture
Esther concluded that her up-to-the- minute awareness of the business’s financial picture is a big factor in successfully managing risk. "Before starting Earle Estates, I ran countless projections to see if we could afford to take on this venture. I know our financial picture at every second of every day, and I know our break-even point. In fact, my husband and I talk about break-even every day."

Your First Pioneer loan officer is in tune with risk management issues of northeast agriculture. Take advantage of our expertise. Contact us at info@firstpioneer.com for more information.

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