Viewpoint - What farmers and airlines can teach us about risk management

Risk management culture at organizations must stretch from the boardroom to the mailroom

14 April 2023


Silicon Valley Bank might still be around, if it had only followed the pragmatic example set by farmers and airlines.

In the wake of the SVB collapse, some believe more regulation is the answer. But a better topic of debate should be how to develop a culture of risk management at organizations that stretches from the boardroom to the mailroom, and protects businesses against shocks and disruptions.

The agricultural community has used risk management tools for decades to smooth price volatility, lock in financing, and protect against droughts, floods, and trade disruptions. And for just as long, organizations like the USDA's Risk Management Agency, American Farm Bureau Federation and the National Grain and Feed Association have advocated for prioritization of risk-management tools – both to protect growers themselves, as well as end-users of agricultural commodities.

Even regulators agree that risk management is an integral part of farm operations. Speaking at the annual NGFA convention in March, US Commodity Futures Trading Commission Chair Rostin Behnam said, “Success or failures along the agricultural value and supply chains trickle down through the economy” and that futures markets are a vital tool in managing risk -- and ultimately, keeping cupboards stocked.

Beyond agriculture, airlines offer further proof of the power that comes from effective risk management. From 1998 to 2008, crude oil increased from $20 a barrel to more than $145 a barrel, a swing of 600%. But instead of being whipsawed by market volatility, Southwest Airlines implemented a hedging strategy using financial products like futures and energy swaps to save an estimated $3.5 billion. That equated to 83% of the company’s profits during that same span and allowed them to reinvest in more jobs, new routes and nearly 150 new aircrafts.

The futures, options and cleared derivatives markets were developed to mitigate the impact of volatility and help production agriculture, energy firms, airlines, banks and main street businesses lock in profitability. Recent market volatility has driven more businesses to hedge risk in these markets than ever before. Last year marked the fourth consecutive record year for global exchange-traded derivatives volume.

But some, like SVB, forego risk management for near-term profits. In testimony before the United States Senate Committee on Banking, Housing, and Urban Affairs, Federal Reserve System Vice Chair Michael Barr testified that Silicon Valley Bank failed because "the bank’s management did not effectively manage its interest rate and liquidity risk."

Supervision and capital standards are important, but they have their limits. We must build incentives that reward strong risk management practices within organizations and provide tools for businesses to manage the inevitable market volatility ahead.

Farmers, airlines, and others have figured this out. It’s time the SVBs of the world followed suit.

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