Risk

One thing we must acknowledge in our business is that we will always be making decisions with some level of uncertainty.  Another thing we must acknowledge is that farmland is only worth what it can produce in net income and that our risks are accounted for when we set the price and make our investment, ideally with some knowledge of the risks.

Risk can be defined in many ways but in its most simple definition it is ultimately a range of various possibilities or possible outcomes. Some of which we can influence and many we can not. It is not uncommon to see investment committees, lenders or insurers waste precious time focusing on (as opposed to acknowledging) all of the “perceived” risks vs the real risks of owning or lending on farmland and frequently fail to consider, more importantly the probabilities of the real (higher) and perceived (lower) risks.

To help organize and identify risks and arrive at a reasonable expectation of possible outcomes we conduct a Farm Specific SWOT analysis, identifying those risks we can influence against those we can not influence,  assign probabilities to the risks and then develop a risk mitigation plan.

The wider the range of possibilities, the higher the risk and the more critical and detailed the underwriting process needs to be. The more narrow the range of possibilities, the lower the risk, and hence less detailed underwriting is required to reach the same level of confidence.

Treat every investment as though diversification is not a risk mitigation strategy and develop a management plan for the individual asset as opposed to a portfolio view.

Some risks we can influence while others we can’t.

Our first goal is to make sure we understand the full range of possibilities…and where we are sitting today on that scale.  Ultimately we want to find every reason not to do the deal and determine whether we can mitigate the risks prior to acquisition or over the life of the investment.

From a valuation standpoint,  the price can only go in three directions:  up, down or sideways – pick any two to help narrow your focus in determining what and how returns might be skewed over future time frames and how your influence can affect the performance.