Financial And Risk Management Assistance

Model Overview

For Texas agriculture to become more profitable and competitive--in light of uncertain weather conditions, risky prices, and increasing production expenses--farmers and ranchers must be better able to weigh the risks and projected impacts of alternative decisions on their operations. In response to this need, Texas Cooperative Extension specialists developed a whole farm and ranch computerized decision support system for long-term strategic planning decisions, called Financial And Risk Management Assistance (FARM Assistance).

Individual agricultural operations statewide, using information specific to their business, can effectively assess the expected financial impact of proposed changes, as well as the financial risk associated with those changes. For example, producers can compare their cash flow risk under various plans, and view estimates of their plan's impact on net worth 10 years down the road; will they be worse off or better off? In the past, management changes were evaluated based on gut instincts and average conditions. Texas producers have, at their fingertips, the ability to evaluate their plans including the risks they face with technical financial expertise. Contact the FARM Assistance team toll free at 1-877-TAMRISK or via the Internet at

Program Background

In 1997, Texas Cooperative Extension was provided funds from the 75th Texas Legislature to develop a pilot risk management education program to address increased financial and marketing risk, as well as the high level of risk associated with production agriculture in Texas. The region of the pilot program included the Texas Panhandle, South Plains, and Rolling Plains. The following year the initiative effort was expanded to cover the entire state of Texas.

The program, referred to as the Texas Risk Management Education Program (TRMEP), was designed to assist Texas farmers and ranchers in better identifying the sources of risk in the operation, inform producers of how to use the tools and/or strategies available for managing risk, and help producers quantify the financial impacts of alternative risk management strategies. As a part of TRMEP, the FARM Assistance program was born.

FARM Assistance is best described as a computerized decision support system. The computer model itself was built on a foundation of 20 plus years of research. Agricultural economists at Texas A&M University have perfected methods in risk analysis and simulating the financial future of an agricultural production firm. These capabilities are now being extended to provide farmers and ranchers in Texas with sound decision making information.

Serving Texas Agriculture

The broad objective of the FARM Assistance program is to improve decision making in and for the agricultural industry of Texas. To that end, FARM Assistance focuses on both the individual producer and the aggregate industry.

Serving the Individual Producer

One of the two main functions of the FARM Assistance program is to provide individualized analytical service for agricultural producers in Texas. The FARM Assistance system provides an agricultural manager with a 10-year financial projection of his entire operation. It is a one-of-a-kind tool, unique in that it includes all of the following features:

The system works to help farmers and ranchers plan for their financial future and the risks they face. Unfortunately, many producers operate their farm or ranch year after year not knowing if their business is sustainable over a long period of time. By using the FARM Assistance system, a producer can gain valuable insights into the feasibility, profitability, and overall viability of his operation. A formal financial outlook can also ease or prompt valuable communication between the manager and family members, partners, or creditors.

The system also has a powerful ability to provide decision information. Farmers and ranchers daily face a risky business environment, in which they must make critical and complex decisions that affect their financial stability and the future livelihood of their business and family. Unfortunately, the information that producers typically use to make even critical decisions is inadequate. For years, farm and ranch managers have based decisions on traditions, instincts, advice from neighbors, or generic advice from experts. While these factors shouldn't be ignored, they shouldn't be the sole basis for critical business decisions. Some managers have the skills to "pencil out" a particular decision with accounting, finance, and economic concepts. Even in these situations, it is difficult to evaluate the full implication of strategic decisions and plans over multiple years.

FARM Assistance fills the information gap, by narrowing down the effect of an alternate plan or strategy to the bottom-line cash flow, profit, and equity impacts. Using the FARM Assistance decision support system, producers now have more and better information than they have ever had to make strategic decisions and formulate viable business plans.

The FARM Assistance Process

Extension specialists work with producers one at a time, so the entire FARM Assistance analysis is an individualized process. Before the process begins, you'll be asked to do a little homework by gathering some paperwork. The required data is readily available from your crop insurance agent, FSA office, accountant, and loan officer. Often the information needed has already been compiled to obtain financing. The total cost of the FARM Assistance analysis includes the time you spend gathering data, the time you spend with the extension specialist, and a subscription fee of $250.

The analysis begins with an initial data collection meeting and can typically be finalized in two subsequent meetings. The information collected in the initial meeting is used to develop a preliminary baseline projection for your operation. In the second meeting you will review input data, verify preliminary results, and develop any alternative strategies that you would like to have analyzed. Finally, in a third meeting, your extension specialist will deliver and explain you FARM Assistance analysis report.

The total time required for this process depends on the complexity of your operation, the completeness of your information, your schedule, and the specialist's schedule. While everyone is different the typical time you'll spend in session with the specialist is 3-5 hours for the initial meeting, 2-3 hours for the review, and 1-2 hours for the final report delivery.

Supporting the Agricultural Industry

While this program has tremendous benefits for the individuals who have participated, it also has unlimited potential to support the Texas agricultural industry at the aggregate level. As a result of conducting almost 600 analyses across the state of Texas, we have developed an extensive database to portray Texas agriculture. While the individual data remains confidential, the collection of data can provide priceless information and research capabilities to aid federal and state policy makers. The aggregate data is also beneficial to the individual producer by identifying the characteristics and factors that make some producers more successful than others. The following are a few examples of the broad benefits and capabilities of the FARM Assistance database:

Farm Bill research -- During the debate process leading up to the passage of the 2002 Farm Bill, the FARM Assistance team in partnership with AFPC provided critical analysis to U.S. Representatives from Texas regarding the potential impact of farm policy provisions on the farmers and ranchers of Texas.

State Tax Policy -- 2004 is stacking up to be a critical year for Texas agriculture. The state legislature will most likely take up the issue of school finance and related tax alternatives. Texas agricultural leaders in the legislature and in commodity and livestock organizations have already called on the FARM Assistance team to evaluate specific proposals and the value of current exemptions that benefit the agriculture industry. The FARM Assistance database should continue to be a valuable resource for producer organizations and law makers in the coming legislative process.

Identifying the Successful Producer -- Like any other business, farmers and ranchers in Texas operate at varying degrees of financial success. Participants in the FARM Assistance program have access to reports that enable them to compare their operation to similar farms or ranches in Texas. In addition, Extension specialists have begun and continue to research the extent to which various business characteristics and factors are related to financial success.

The FARM Assistance Projection

The core of the FARM Assistance decision support system is a ten-year financial and economic projection for a farm or ranch assuming a specific strategic plan of action (long term plan of operation). The initial projection is called the "baseline." The baseline is intended to give the manager a sense of where the business may be headed financially, and to uncover potential strengths and weaknesses in the operation. The baseline also provides a benchmark against which to compare projections of alternative strategic actions.

We use a computer program that starts with information provided by the producer describing the activities and current situation of the farm or ranch. The program then generates an economic environment in which the farm or ranch operates over the next ten years. The economic environment consists of specific factors such as prices, yields, inflation, interest costs, etc. In no way are we suggesting that we know exactly what the economic conditions will be for the next ten years. However, a great deal of scientific research and expertise are gathered annually by the FAPRI and AFPC research teams to develop a projection specifically for agriculture over the next ten years.

This single projection is only one of the many possible outcomes that could happen over the next ten years. Simply put, the future is risky. The unique advantage of the FARM Assistance projection is that it illustrates the risk associated with the future financial success of the business. The process of simulating the operation's strategic plan over the next ten years is actually repeated 100 times. During each repetition the operation faces a different set of prices and yields. The 100 different possible futures are developed using tested statistical methods so that the risk reflects the past conditions experienced by the farm or ranch and the forecasting expertise of the FAPRI / AFPC projection.

The result is 100 potential financial outcomes. In this sense, the FARM Assistance projection is not a single projection, rather it is a picture of the range of possible outcomes that a farm or ranch could expect to face over the next ten years. Using this range the analysis describes the risk in the financial future of a farm or ranch.

The FARM Assistance Analysis

A key objective of the FARM Assistance analysis is to compare and contrast the expected outcomes of different strategic actions for a farm or ranch. This type of analysis is often referred to as investment analysis or capital budgeting. The idea is that the farm or ranch manager has an investment, a set of capital resources, and opportunities at his disposal. The key question is: What is the best plan to follow given my current situation as well as the opportunities and risks that I face?

An investment analysis is typically focused on two main issues, financial profitability and financial feasibility. The first is the issue of which plan is more profitable or beneficial, that is, which will lead to more net worth in the end. A more profitable plan can also be one that provides for a greater standard of living along the way. Second is the issue of whether the plan is feasible. Will it cash flow or is it likely to fail? Finally, the risk associated with both of these measures is a critical factor the producer should consider when making a strategic decision.

The projected change in the financial position of a business is a significant indication of the plan's profitability. For this reason the analysis will often focus on the change in real net worth over the time period and compare the projected ending real net worth of each alternative. Pointing out the annual cash position and the probability of cash shortages highlights the feasibility of each plan.

Again, this analysis is intended to provide information to support a producer's decision making process. It is not intended to make a decision for you. Because the FARM Assistance analysis compares the ranges of possibilities for different strategic actions, it is not always clear that one plan is better than another. It may be that one plan is expected to generate more net worth, but it is less feasible in terms of cash flow. In other cases, an alternative plan may have a higher average net worth but more downside risk. You must also weigh other factors in your decision such as the level of work or stress associated with a particular strategic plan.

For these reasons the FARM Assistance analysis will make no recommendations. The decision made is up to the individual and will depend on personal preferences and the level of risk each individual is willing to take. The purpose of the FARM Assistance program is to objectively present the information that will be the most valuable in helping you make your decision.

Results and Impacts

FARM Assistance has been used to analyze all types and sizes of crop and livestock operations. Over 1,000 alternative scenarios with their associated risk have been analyzed for individual producers statewide-- representing 1.9 million acres of crop and pasture land.

One measure of the FARM Assistance program's impact is the projected net worth consequences of alternative scenarios analyzed for each subscriber. This measure indicates the gain in net worth a producer would likely see, at the end of the 10-year planning horizon, resulting from choosing the better of two alternatives. Just looking at the difference between the base situation and one alternative scenario implies that producers going through the program, on average, could expect a $28,000 per year difference in net worth compared to making the worst case decision. For the 10-year planning horizon, that's almost $300,000 per subscriber.

The FARM Assistance Team

FARM Assistance is technically a "computerized decision aid" or "decision support system." While the foundation of the program is a computerized financial forecasting model, the real backbone of the service is the individual specialists who conduct the analysis and deliver the information in a professional format. FARM Assistance is not software; rather it is a service provided by a technical analyst.

To find out more or sign up for the FARM Assistance program, look us up on the web:

Or contact the FARM Assistance specialist near you:

Amarillo DeDe Jones 806-677-5667
Amarillo Dustin Gaskins 806-677-5681
Lubbock Jay Yates 806-746-4056
San Angelo Wade Polk 325-653-4576
Uvalde Will Phinizy 830-278-9151
College Station Steven Klose, Dean McCorkle,
George Knapek, Greg Kaase
Toll free 1-877-TAMRISK