Scenarios

What will the future look like?  How will this affect my business?  What will I do if food, energy and feed prices go up?  What will I do if they go down?  How will erratic weather in the growing season affect the farm?  What if my buyer faces a major recall?  What happens if a customer makes a food safety complaint? The population is aging and the labour pool is shrinking, how will that affect me?  What will happen to my markets if my customers have even less time or disposable income? I really just want things to stay the same, is that possible?

While no-one can predict the future, we can imagine plausible outcomes.  Developing scenarios can be a very useful tool for managing strategic risks by asking the question “What if?”.  Scenarios can be especially useful in situations where change is rapid, where there is limited historical precedent or cycle and when the potential upside or downside is significant.  Scenario planning can be based on a few constructed scenarios or take a number or factors, situations and circumstances and create random, but potentially insightful exercises.  In engineering, medicine, military and finance this idea is sometimes called “stress testing”, i.e. what factors combination of factors could cause a building, body, front line or retirement portfolio to become vulnerable.  The flip side of the exercise of course is to discover potential scenarios that present significant opportunity. 

Change is pervasive, constant and seems to be happening at a faster rate in the economy, demographics and the environment.  An important exercise for all farms to consider is the likelihood of the status quo continuing (be that a desirable or undesirable option).  What has to happen for the status quo to be maintained?  Given present trends, how likely is that to occur?  Should this conclusion impact your farm?

The main benefit of Scenario Planning is that you can prepare and understand the potential affects ahead of time.  It puts the farm manager in a position of control, where you are not just “reacting” to events or feeling like a victim of circumstance, the gods or large players in the industry.

The process for Scenario Planning on your farm can be as follows:

1. Decide drivers for change/assumptions
2. Bring drivers together into a viable framework
3. Produce several initial mini-scenarios
4. Reduce to 2-3 scenarios
5. Draft the scenarios
6. Identify the issues arising
7. Integrate the information into your strategic plan
8. Repeat at regular intervals as the times change

Wikipedia Entry on Scenario Planning

Calculating change scenarios

Sensitivity analysis is a tool that is used to determine the impact of a particular change to your prices or expenses.  For example, how will your farm’s performance improve if you increase prices 20%?

Sensitivity analysis can help inform your decision making and present multiple scenarios on paper.  The outcome usually includes best, normal and worst case scenarios.

The sensitivity analysis can also be very useful to understanding your businesses vulnerability to external risks.  It can be very useful for developing back-up plans and building resiliency.   What would happen to your business if:

the price of diesel increased 50%?

the price of grain increases 30%?

the price offered by the feed mill dropped by 10%?

in order to attract labour during the harvest season you had to pay $2 more an hour?

A disease outbreak reduces yields by 25%?

Interest rates go up 1% or the currency drops 20%?

To complete a sensitivity analysis you will need to understand your costs, revenues and what potential risks affect your operation.  The sensitivity analysis will help you prioritize risks and their management.  Risks with the greatest potential to impact your profitability should be addressed first.  

If your analysis indicates that your enterprise is highly vulnerable to even small changes in costs or revenues, you may want to rethink the endeavor.

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