Risks and Challenges Associated With Owning and Operating a Farm Property | United Country Real Estate

August 16, 2023
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Learn strategies for success when navigating farm ownership challenges: weather risks, market fluctuations & legal complexities.

Risks and Challenges Associated With Owning and Operating a Farm Property

Operating a farm property carries a fair share of risks and challenges. Many of the elements affecting the profitability of a farm operation include uncontrolled factors like the weather, the state of the economy, and the current market.

With fluctuating farm income, proactive risk management strategies are essential for mitigating potential setbacks. The size of the farm, general operational practices, and direct farmland ownership come into play when assuring the longevity of any farming operation.

Navigating the world of farmland investment requires a comprehensive insight into the risks involved. For those who have been farm owners for decades, the risks are well-known, for those looking to invest, education on the potential setbacks will be an important step in the acquisition process.

Production Risks

Weather-related risks impacting crop yields and livestock health

The success of agricultural production heavily relies on favorable weather conditions. Any major events such as droughts, floods, storms, and extreme temperatures will have a significant impact on crop yields and livestock health.

A well-prepared farming operation will have strategies already in place. These may include irrigation systems or greenhouse cultivation methods that provide controlled environments for crops. Although these preventative steps do not always guarantee a successful farming year, they tend to alleviate some of the potential risks related to weather and climate changes. 

Pest and disease outbreaks affecting agricultural production

Insects, rodents, birds, or even invasive plant species pose a serious financial risk to your crop operations.

Similarly, diseases can rapidly spread among animals and an outbreak of avian influenza or foot-and-mouth disease could lead to the mass culling of infected animals for containment purposes. This may also affect long-term production as raising livestock may be limited for a certain amount of time.  

Minimizing the risks is part of a well-thought-out plan that should be revisited each year.

Equipment breakdowns and needs for upgrades

Investing in equipment maintenance will prevent any significant disruptions and delays, especially when it comes to harvesting crops. 

During peak seasons, when time is crucial for planting or harvesting, any delay can have the most consequences. For those just starting in the farming operation business, this point will become a quickly learned lesson. The losses associated with machinery failure are often hard to recover and renting equipment will ultimately take away from any profits associated with the current harvest.

To minimize the impact of equipment breakdowns, implementing preventive maintenance schedules and conducting regular inspections is recommended. 

Marketing Risks

Owning and operating a farm property comes with its fair share of risks and challenges. One area where farmers often face difficulties is marketing their agricultural products.

Fluctuating market prices for agricultural products

The prices of crops and livestock can vary greatly depending on supply and demand, weather conditions, and global economic trends. These price fluctuations can have a significant impact on a farmer's profitability and use of the land.

Although this does not always come to the forefront, monitoring commodity markets, engaging with industry experts, and improving processes and technology can ensure a successful year for any farmer.

Limited access to distribution channels and buyers

Unlike large-scale agribusinesses that have established networks in place, smaller farms often struggle to reach potential customers effectively. Exploring alternative marketing strategies beyond traditional channels may be the way to secure reliable distribution and long-term relationships.  

Changing consumer preferences and demands

The ever-evolving landscape of consumer preferences poses yet another challenge. Being able to diversify or adapt quickly and efficiently to market trends may improve the profitability of farming operations. The introduction of new breeds, and utilizing technology to stay ahead of the predicted changes, all can help farmers secure a better future for their land.

Financial Risks

Farming requires a lot of hard work and a large initial financial investment.  Focus on building a profitable business should be at the forefront of any successful farming operation.

High upfront costs for land, equipment, and infrastructure investments

Purchasing land, acquiring necessary equipment, and building essential infrastructure can quickly add up to significant expenses. These initial costs often affect farmer's financial resources.  Planning for this and understanding the overall timeframe for return on investment can help in creating a better-functioning farm.

Low-interest government loans or leasing agreements are things to consider before making a purchase.

Volatile commodity markets affecting profitability

Fluctuations in prices for crops or livestock can significantly impact profitability. Diversifying crop selection or exploring alternative revenue streams can help farmers minimize losses during periods of market instability.

Difficulties securing loans or financing for farm operations

Securing loans or financing for farm operations can be an uphill battle due to economic conditions and limited government programs.

Farmers facing difficulties in obtaining conventional loans may seek alternative financing options tailored specifically for agricultural purposes.  This is usually the best place to start when looking for expansion capital or improvement loans.

Government-backed programs like Farm Service Agency (FSA) loans provide financial assistance to farmers who may not meet the requirements of traditional lending institutions. 

Insurance policies for risk management

Given the inherent risks of farming, having appropriate insurance coverage is a must-have part of a business plan.  Insurance policies tailored for farm properties provide protection against various perils such as crop failure, livestock diseases, or property damage. When selecting the insurance plan, make sure if offers adequate coverage.

Legal Risks

Legal risks come down mostly to compliance with complex regulations related to food safety and environmental standards. Failure to do so can result in penalties, fines, or even the closure of the farm.

From pesticide use to waste management, there are numerous rules to follow in order to keep your operation within legal boundaries.

Liability risks often come into play as farming operations expose employees to unfavorable conditions and operations are prone to accidents or injuries. Correct liability insurance coverage in place is a part of the upfront cost planning.

Land use restrictions or zoning changes imposed by local authorities may limit certain farming practices or even prohibit them altogether in specific areas. Before purchasing a piece of property, check with the local government on the zoning and rules for applying for variances or rezoning requests.

Environmental Risks

Soil erosion and degradation greatly reduce productivity and impact the overall health of the land. This leads to decreased crop yields and a decline in agricultural output. 

To combat soil erosion and degradation, farmers employ contour plowing, terracing, and cover cropping as some of the methods to help prevent excessive water runoff and promote soil conservation.

Water scarcity or pollution presents a significant challenge as access to clean water is critical for irrigation purposes as well as livestock management. 

Droughts or contamination can severely limit water availability or render it unsuitable for agricultural use so purchasing a farm with access to reliable live water may be an important consideration before making a land investment.

The ever-increasing effects of climate change further compound the risks faced by farm owners.  Fluctuations in temperature patterns, precipitation levels, and extreme weather events significantly impact crop suitability and pest management strategies.

As a farm operator, there may come a need to adapt planting schedules accordingly or explore alternative crop options that are better suited to changing climatic conditions.

This article is not intended in any way to bring doubt to the opportunities related to owning a farming operation. It highlights some of the most common misconceptions about managing a farm. Once all the above points have been taken into consideration, the farm can be set for success and improved profitability. Looking at farming as a business-first operation will help alleviate any unexpected expenses and create many growth opportunities.