Preparing to Make Decisions During a Drought

Department of Agricultural EconomicsDepartment of Agricultural Economics

Preparing to Make Decisions During a Drought

2021 UNL BeefWatch Drought Management Webinar Series

Jay Parsons, ProfessorFarm and Ranch Management SpecialistDepartment of Agricultural EconomicsUniversity of Nebraska-Lincoln


Why Bother Making Decisions?• Decisions are hard, especially when you have lots of choices and lots of uncertainty.

• Decisions are the only way you can purposefully influence your life. The most powerful thing in the world for a business owner is a decision.

• Decisions are your opportunity to maximize the possibility of achieving your goals & objectives.

• Decisions are opportunities to shape the environment your choices are made in. That is, they are not just problems to be solved.


Smart Choices in Agriculture

A Decision Making Process for Proactive Decision Making

Establish the context

Internal Context

External Context

Objective(s) Involved

Assessment

Risk Identification

Risk Analysis

Evaluate Tradeoffs

Implementation

Com

munication &

Consultation

Identify Decision Opportunity

Generate Alternatives

Evaluate Consequences

Make the Decision

Rev

iew

, Mea

sure

& R

evis

e


Seven Characteristics of a Good Decision

1. An appropriate decision frame2. Clear values to adhere to and objectives you are

trying to accomplish3. Creative alternatives to choose from4. Good information5. Clear tradeoffs and sound reasoning6. Choice alignment with values and objectives7. Committed implementation



Internal Context

External Context


Assessment

Risk Identification

Risk Analysis

Evaluate Tradeoffs

Implementation

Com

munication &

Consultation




Make the Decision

Rev

iew

, Mea

sure

& R

evis

e


• Recognize opportunity to make a choice– Alternatives (choices to choose from)

– Objective(s) (reason(s) to choose)



Internal Context

External Context


Assessment

Risk Identification

Risk Analysis

Evaluate Tradeoffs

Implementation

Com

munication &

Consultation




Make the Decision

Rev

iew

, Mea

sure

& R

evis

e


• Recognize opportunity to make a choice– Objective(s) (reason(s) to choose)

– Alternatives (choices to choose from)



What should I do to prepare for a possible drought?



Internal Context

External Context


Assessment

Risk Identification

Risk Analysis

Evaluate Tradeoffs

Implementation

Com

munication &

Consultation




Make the Decision

Rev

iew

, Mea

sure

& R

evis

e

Establish the Context

• Identify the objectives you are trying to achieve by making the decision.

• Describe the internal and external context in which you are making the decision.

• Identify involved risks and uncertainties.


The Art of Identifying Objectives

• Step 1: Write down the concerns you hope to address by making the decision.– Wish List: What would make you really happy?– Worst Outcome: What do you most want to avoid?


Definitions

• Attributes – things you value and measure (profit, debt, happiness, etc.)

• Objectives – directions of improvement of one or more attributes like increasing profit or decreasing debt, etc.

• Goals – combining an attribute with an acceptable target level of achievement. Goal: Debt reduced to less than 20% of asset value.


The Art of Identifying Objectives

• Step 2: Convert your concerns into short, clear statements describing what you want to accomplish

• Step 3: Separate the ends from the means to establish your fundamental objectives – keep asking “Why?”


Fundamental vs. Means Objectives and Goals

• Fundamental objectives capture the fundamental reasons behind your decisions.– They help you evaluate alternatives.

• Means objectives lead you toward accomplishing your fundamental objectives.– They help you identify alternatives.


Objectives HierarchyMaximize Quality of Life

Improve the productive value of

the land we manage

Maximize Net Income Maximize Health

Minimize cost of production

Decrease Reliance on

Purchased FeedIncrease available forage

Decrease feed cost

Primary

Fundamental

Means

Minimize Risk

Maximize Revenue

Maximize probability

Sale Price >COP

Minimize the Impact of Drought


Objective Focused Thinking• Clear objectives

– help identify choices you can make– help determine the information you need– help determine the importance of decisions– speed up the evaluation of your decision choices– help explain the choices you make to others.

• Let your objectives be your guide.– A full, clear set of objectives is the key to making good decisions more consistently.


Objectives

What should I do to prepare for a possible drought?

1. Maximize probability sale price > cost of productiona) Short termb) Long term

2. Maximize profit



Internal Context

External Context


Assessment

Risk Identification

Risk Analysis

Evaluate Tradeoffs

Implementation

Com

munication &

Consultation




Make the Decision

Rev

iew

, Mea

sure

& R

evis

e


• Objectives• Internal situation• External conditions• Risks



Range conditionsFencingCattle inventoryLabor situationFinances

Nearby forage marketHay prices are reasonableGrazing land is fairly expensive

Cattle markets Weather forecastUSDA (disaster) programsInsurance options

What are the major uncertainties? What are the worst case scenarios? What are the best case scenarios? Most likely scenarios? Probabilities?


Federal Insurance/Program Tools

• Crop insurance (USDA‐Risk Management Agency)– Livestock Risk Protection (LRP) insurance– Rainfall Index (RI) insurance

• Pasture, Rangeland, and Forage• Annual Forage

– Whole Farm Revenue Protection (WFRP)

• Farm Service Agency (FSA) Programs– Noninsured Crop Disaster Assistance Program (NAP)– Livestock Forage Disaster Program (LFP)– Livestock Indemnity Program (LIP)– Emergency Assistance for Livestock, Honey Bees, and Farm‐raised Fish

(ELAP)– Conservation Programs (NRCS)

rma.usda.gov

fsa.usda.gov



Internal Context

External Context


Assessment

Risk Identification

Risk Analysis

Evaluate Tradeoffs

Implementation

Com

munication &

Consultation




Make the Decision

Rev

iew

, Mea

sure

& R

evis

e

Key Principles of a Good Risk Management Culture

1) Ability to anticipate decisions2) Adequate resources and

capacity to respond to changing conditions

3) Free flow of information into and throughout the organization

4) Willingness to learn and adapt5) Risk management is embedded

in all decision making processes



Internal Context

External Context


Assessment

Risk Identification

Risk Analysis

Evaluate Tradeoffs

Implementation

Com

munication &

Consultation




Make the Decision

Rev

iew

, Mea

sure

& R

evis

e


• Alternatives are possible courses of action

• Be creative and do your ownthinking first!

• Use your objectives, “How can I accomplish this objective?” and “What objective does this alternative address?”

• Ask others for suggestions • Iterate and generate better

alternatives



Internal Context

External Context


Assessment

Risk Identification

Risk Analysis

Evaluate Tradeoffs

Implementation

Com

munication &

Consultation




Make the Decision

Rev

iew

, Mea

sure

& R

evis

e

Assessment

• Evaluate Consequences

• Risk Analysis• Evaluate Tradeoffs



Internal Context

External Context


Assessment

Risk Identification

Risk Analysis

Evaluate Tradeoffs

Implementation

Com

munication &

Consultation




Make the Decision

Rev

iew

, Mea

sure

& R

evis

e

Key Principles of a Good Risk Management Culture

1) Ability to anticipate decisions2) Adequate resources and

capacity to respond to changing conditions

3) Free flow of information into and throughout the organization

4) Willingness to learn and adapt5) Risk management is embedded

in all decision making processes


Thank You!

Jay Parsons, Professor Department of Agricultural [email protected]

Preparing to Make Decisions During a Drought

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