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ENTERPRISE RISK ANALYSIS

John P. Hewlett and Jay Parsons

Summary

United States farm policy enacted since 1996 has created a need for agricultural producers to better understand and manage risk. However, risk is a difficult concept to address because the ideas are challenging and the breadth of solutions is wide. Even where the concept is well understood, few have mastery of the tools and skills needed to properly evaluate alternatives.
RightRisk has been involved in developing teaching simulations, online courses, and risk decision tools since 2001. The team’s Enterprise Risk Analyzer (ERA) tool provides farm and ranch managers much-needed assistance in evaluating risk management alternatives. The ERA tool utilizes an Internal Revenue Service (IRS) Schedule F and a series of other schedules as the basis for evaluating enterprise risk, including enterprise net income and break-even analysis. From these, the manager is in good position to evaluate each enterprise on its own merit, compare it to other enterprises, and to do so with a better understanding of the uncertainty involved with the outcomes.
The Enterprise Risk Analyzer tool enhances the manager’s understanding of how breakeven prices and yields are likely to vary over time. Using the risk-estimates provided by the user as most likely, minimum, and maximum estimated yields and prices for each enterprise, the tool provides tabular and graphical information for the probability of breaking even over a range of values. The ERA tool describes possible outcomes using a cumulative distribution graph that indicates the probability of earning a net return at or below a given value.

Details

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