- - AGRICULTURAL CORE CURRICULUM - -

(CLF1000)  Advanced Core Cluster: AGRICULTURAL BUSINESS MANAGEMENT

  (CLF1200) Unit Title: ECONOMIC PRINCIPLES

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  (CLF1207) Topic:  MANAGING RISK               Time                    Years
                                              1.5 Hours                 3 / 4
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           Topic Objectives: Upon completion of this lesson, the
                       student will be able to:

           Learning Outcome #:

              (E-7)  -  Describe economic decision-making tools that can be 
                        used to help determine the profitability of
                        agricultural enterprises.  

           Special Materials and Equipment:

           References:  Casavant, K., & Infanger, C.  (1984).  ECONOMICS & 
                          AGRICULTURAL MANAGEMENT: AN INTRODUCTION.  Reston,
                          VA: Reston Publishing.
                        Leftwich, R. H. (1976).  THE PRICE SYSTEM AND RESOURCE
                          ALLOCATION (6th ed.).  Hinsdale, IL: Dryden Press.

           Resources:   Looney, J. W.  (1983).  BUSINESS MANAGEMENT FOR 
                          FARMERS.  Available from: Doane Information 
                          Services, 11701 Borman Drive, St. Louis, MO  63146.

           Evaluation: Unit Exam

TOPIC PRESENTATION: MANAGING RISK

A.  Risk and Uncertainty

    1.  Every economic decision involves a certain amount of risk.

    2.  Economic principles and economic tools can be used to minimize risk;
        however, risk cannot be completely eliminated.

    3.  Risk is a situation where the outcome is unknown, but the probability 
        of alternative outcomes is known.

    4.  Uncertainty is a situation where the probabilities of different 
        outcomes are unknown.

    5.  Risk is manageable while uncertainty has to be accepted.

    6.  Agriculture has both high risk and high uncertainty.

        a.  Weather uncertainty - temperature, moisture, and wind

        b.  Weather-related natural disasters - frost, hail, flood, tornado

        c.  Yield uncertainty - disease, insect damage

        d.  Market uncertainty - Individual producers have little impact or

            control over the price received for products; consequently, 
            prices--and ultimately income--are both uncertain.

        e.  Price uncertainty - Short and long run price variability caused by 
            business cycles and inflation

        f.  Labor uncertainty - Change from manual labor to machines causes 
            uncertainty; additionally, both labor supply and labor cost are 
            affected by demographic, political, and economic factors that 
            constantly shift.

        g.  Political uncertainty - Federal government regulations and 
            programs constantly change.

    7.  The selection of the commodities to produce is one way to minimize 
        uncertainty; some crops are less risky to produce than others.

    8.  Minimizing risk can be done in a variety of fashions:

        a.  Insurance - property, crop, liability, life, health and accident

        b.  Diversification - spreading the risk among different enterprises

        c.  Production Contracts - Having a contract with a buyer guarantees a
            place for a crop.

        d.  Futures Contracts, Options, Forward Contracts - The price that 
            will be received for a commodity is known early in the production 
            cycle.

        e.  Selection of low-risk/low-uncertainty enterprises

B.  The Problem of Time and Money

    1.  Time has a major impact on both costs and revenues.

    2.  Interest is the cost of borrowing money from someone else; the longer 
        money is borrowed, the more it costs in interest added to the original 
        sum.

    3.  Interest rates are a measure of the opportunity cost of money.

    4.  Money invested in a farming operation or business instead of being 
        held in the bank has an opportunity cost of 5-15% percent.


    5.  Money in the bank earns interest; the longer it is left the more 
        interest it earns because the interest added to the original sum
        earns interest.  This is called compounding.

    6.  A dollar received in the future is not worth as much as the 
        same dollar today.  This is called discounting.

        ________________________________________________________
        ACTIVITY:

        Identify the different decision-making tools that have
        been discussed so far.  How are they used to minimize 
        risk?
        ________________________________________________________

C.  Any business venture involves risk.  The ability to minimize risk is 
    a major factor in business success.





12/5/91 LM/sg


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