Risk Management for Nursery Growers

Linda Benedict  |  5/14/2005 3:58:09 AM

Nursery in Forest Hill, La. (Photo by John Chaney)

Roger A. Hinson

In the nursery business, as in the rest of agriculture, uncontrollable events such as weather, changes in markets or currency valuations cause product prices to rise or tumble. These factors can change revenues and expenses. This risk may be managed to a certain extent by individuals and government-sponsored programs. Farmers who produce major field crops such as corn and cotton have had programs including acreage controls, price floors and ceilings, loans, crop storage programs, disaster payments and others to mitigate these risks; growers of specialty crops (mostly fruits, vegetables and nursery plants) have fewer of these tools.

However, producers of specialty crops have freedom to change the quantities they produce and sell based on market demand. In the nursery industry, growers develop their own customer base and often attend trade shows where producers and customers gather. Another important factor in risk management for these growers is the absence of a central marketplace where prices are determined by market forces; prices for specific grades of products are not collected and reported. These factors suggest that the quantities of products coming to market, and the prices for those products, are not easy to predict.

All agricultural producers face several forms of risk:

  • Production risks (weather, diseases, pests)
  • Market risks for both inputs and outputs
  • Financial risks that include the exposure of borrowing and
    repaying
  • Institutional risks that include governmental actions such as tax laws and regulatory changes
  • Human or personal risks (accidents, illness, death)

Nursery growers have access to a set of management tools and strategies available to the general agricultural community – crop diversification, debt management, contract sales, insurance and off-farm employment. But other important tools, such as use of futures markets, are not available.

Traditional farm management research and extension programs provide an opportunity to learn about management of risk:

Planning and budgeting facilitate informed decision-making, cash flow projections and capital planning.

Crop diversification may offset weather and disease risks by matching crops so that if one crop fails, another has a reasonable chance of succeeding. Appropriate diversification, however, may reduce potential revenue even as it stabilizes income.

Market diversification can work in a similar way. For example, in the early 1980s some Louisiana growers focused their sales efforts on the Texas market, particularly Dallas and Houston, because those markets were strong. An unexpected recession left those growers with few alternatives and with potential financial problems. In other cases, growers have dedicated large portions of their crops to specific buyers such as mass merchandisers that are sensitive to price and will switch suppliers if they can buy for less. This illustrates the riskiness of reliance on a single channel.

Crop insurance transfers risk to those who, for a price, are willing to accept it. Insurance protects against losses, thereby stabilizing revenues. It is intended to manage risks and protect income, not to be an investment. It is one tool in the risk management arsenal to help assure that the farm can weather adverse conditions. Nursery growers can buy multiple-peril crop insurance to insure against yield losses from most natural causes and can buy revenue insurance for situations where gross revenue falls below a specified level. In addition, growers may be included in government disaster programs and may be eligible for emergency loans that are direct payments to farmers when yields are affected by adverse conditions such as storm or drought.

The U.S. Department of Agriculture’s Risk Management Agency reports insurance has been used by some Louisiana nursery growers. The "nursery field grown and container" program, which is available in 64 parishes, sold 50 policies with insured value of almost $12.8 million in 2004.

In contrast to row-crop farmers, nursery growers and other specialty crop producers traditionally have relied on market-oriented activities, marketing skills and trade shows to sell their products. In addition to the traditional management recommendations that serve to reduce risk, insurance programs are tools to manage revenue risk. Growers should evaluate all the tools available to assure a consistent income stream, adequate to meet business and family needs.

Roger A. Hinson, Professor, Department of Agricultural Economics and Agribusiness, LSU AgCenter, Baton Rouge, La.

 (This article appeared in the spring 2005 issue of Louisiana Agriculture.)

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