Agricultural RisksAgriculture is a risky occupation. Farmers are confronted on a daily basis with decisions that affect their financial returns and overall welfare. The consequences of decisions are often not known with certainty until long after the decisions occur and the outcomes can be better or worse than expected. What are the main sources of risk in farming, and how might farmers change their management practices to reduce their exposure to production risk and to price and market risk? IntroductionLike any other business, agriculture comes with associated risks that affect production, profits and the management of the farming process.
In the past farmers have used several techniques which have been useful for the mitigation of these risks but in the modern world, the process of farming risk management is a lot more scientific. However, to better understand and appreciate the process of risk management we must first understand what risks a farmer undertakes when s/he engages in the business of agriculture. Main Sources of RiskRisk can be defined in business terms as the potentially detrimental impact on one or more assets as well as expectations for a business enterprise.
Risks can come from engaging in some business activity at the present time or taking up certain positions against future expectations. Fundamentally, risk includes both the expectancy of a certain event occurring as well as the magnitude of positive or negative impact it could have for a farmer. With this meaning of risk, there are some primary risks faced by farmers around the world and they have been summarized by Keith (1999) as: Production based riskRisks Connected with PriceThird Party RisksHuman behavior related risksThere are also financial, legal and other risks which a farmer might be faced with but for all practical purposes, these risks are not unique to the farming process while the five main risks mentioned above are directly connected to agriculture in a significant way.
For example, production based risks are a part of daily life for all farmer even though there may be some variations. Farmers in certain locations may be blessed with highly predictable and stable weather as well as ample means of irrigation therefore they may have low production risks.
On the other hand, framers who work in the Texas plains may have a very different situation because rainfall is very important for them and even if it is timely there is a risk of other natural calamities (Keith, 1999). Price Risks are based on futures prices, basis rates and spreads. These three function similar to the stock market and are dependent upon social and political factors in local as well as global terms. Futures prices are declared by a board of trade like the Chicago Board of Trade or the Kansas City Board of Trade to the extent that local prices are often directly linked with the prices given at these exchanges.
Price risks can also be affected by transportation costs, demand for the produce and other external factors (Keith, 1999). Futures prices can be very volatile in the farming business therefore it is a risk which must be managed.