Risk Management on a Trochu Fish-Farm

“Tilapia are the most widely-grown farmed fish in the world,” says Curt McNaughton, who co-owns and manages MDM Aqua Farms, along with his parents and two brothers. “They’re one of the top-ten consumed seafood products in the United States.”

His projected goal is to raise 75,000 pounds of seafood per year, which will be shipped live to Asian markets in Calgary and Edmonton. “Tilapia is a warm-water fish that is very popular among the ethnic population,” McNaughton says.

When the McNaughtons began to consider expansion and diversification, they decided they needed to analyze the risks involved. Curt signed up for a RiskChoices program, to help clarify their proposal.

Alberta Agriculture, Food and Rural Development is helping producers to manage change in a positive way, with this new risk management tool. “Risk often relates to an uncertain future event or occurrence,” says Dean Dyck, financial business analyst with Alberta Agriculture, Food, & Rural Development. “Several risky events affect agriculture, including production risks and market risks.”

Factor in events like the three-year drought, the grasshopper infestation and the BSE crisis, and agriculture starts to look like a roulette wheel.

Some of these events relate to yield gain or loss, death loss in animals and changes in product or input prices.

Despite this, effective management of risk can help improve the chances that good things will happen, says Dyck. “Opportunities can be captured and losses are avoided.”

The approach is extremely flexible and is especially valuable in situations where there is isn’t enough data. “Producers can progress through a series of worksheets to help them to identify, measure and manage strategic risk,” adds Dyck. “The approach includes words, ideas and discussion, rather than just mathematical calculations.”

Risk Choices has five steps: 1) Identify the potential risks; 2) Assess the risks; 3) Plot the results on a graph to see a visual representation; 4) Develop strategies to manage the risks; 5) Re-assess the severity of the risks based on having risk management strategies in place.

“It simplifies risk by separating each one into the two components of likelihood and impact,” Dyck says. “It generates discussion by getting risks ‘out on the table,’ where the whole management team can talk about them and come up with strategies.”

He notes that although this type of process is new to most agri-businesses, the oil and gas, accounting and high-tech sectors have been using it for years. “This approach to risk management is known as enterprise risk management (ERM), or project risk management,” says Dyck. “It keeps track of the risks and strategies created, through an organized method using worksheets.”

The Canadian On-Farm Food Safety Risk Management Program uses a very similar concept.

“Like most farmers, we tend to look at the production side, and not so much at the marketing side,” McNaughton says. “Through RiskChoices, we learned that we could reap more rewards if we could improve our marketing approach.”

As well, they gained valuable information on how to identify the market-size in Alberta. “We also learned how to implement higher health standards,” he adds.

RiskChoices adds to the risk management arsenal of producers and processors. “While most people think of risk as negative, the future may also turn out to be better than expected,” says Dyck.

Advantages of using RiskChoices:

• RiskChoices is adaptable, and can be used whenever you need to identify, measure and manage risk.
• RiskChoices uses words and ideas, instead of numbers, math and statistics.
• RiskChoices simplifies risks by separating each one into two components: likelihood and impact.
• RiskChoices generates meaningful and structured discussion about managing risk.

• Changes in financial structure, such as debt servicing, debt structure and solvency;
• Changes in competitors and competition;
• The changing habits of consumers;
• Availability of adequate and trained employees;
• Political risks including trade agreements and policy;
• Technological change;
• Changes in operations and business practices, such as contracts, natural hazards and facilities.

Other Articles November 2005