How to reduce risk and uncertainty in agriculture


The best way to mitigate the uncertainties faced by production agriculture is to ensure that the operation is being run by an experienced, professional farmer who makes decisions based on profitability. Variables such as weather, water, and disease that most growing operations face can be mitigated by someone who knows what he or she is doing.

Crop Insurance.
  1. Measure # 1. Diversification:
  2. Measure # 2. Flexibility:
  3. Measure # 3. Liquidity:
  4. Measure # 4. Capital Rationing:
  5. Measure # 5. Contract Farming:
  6. Measure # 6. Choice of Reliable Enterprise:
  7. Measure # 8. Discounting for Risk:
  8. Measure # 9. Maintaining Reserves:


What is the best way to manage uncertainty in the agricultural sector?

Maintenance of extra multipurpose equipment and labour force larger than what is normally necessary, to meet some types of uncertainty e.g., floods, etc., may be helpful. Maintenance of food reserves may also be helpful at times. Measure # 10. Guaranteed Agricultural Prices:

What are the different types of uncertainty in crop production?

Technological uncertainty: farmers may not be aware of the exact impact of new technology on the quantity and quality of yield.  Institutional uncertainty: Conditions of tenure, functioning of credit agencies are examples for institutional uncertainties.

What is the importance of risk in agriculture?

Risk in Agriculture. Risk is an important aspect of the farming business. The uncertainties inherent in weather, yields, prices, Government policies, global markets, and other factors that impact farming can cause wide swings in farm income.

What is risk and uncertainty?

1.To study the types and sources of risk and uncertainty in agriculture Risk and Uncertainty Risk Vs Uncertainty BASIS FOR COMPARISON RISK UNCERTAINTY Meaning The probability of winning or losing something worthy is known as risk. Uncertainty implies a situation where the future events are not known.


What can farmers do to reduce risk?

Planting diverse crops to provide staggered harvesting windows and marketing options, buying crop insurance, stockpiling grass and hay for cattle in case of drought, vaccinating calves against disease – all are well-worn risk-management tools.

What are sources of risk and uncertainty in agriculture?

The uncertainties inherent in weather, yields, prices, Government policies, global markets, and other factors that impact farming can cause wide swings in farm income. Risk management involves choosing among alternatives that reduce financial effects that can result from such uncertainties.

How do you manage risk and uncertainty?

Uncertainty and Risk Management: What to Do About Black Swans?Identify risk events.Assess the probability of each event.Make a cost-benefit analysis of response alternatives.Choose a response.Re-assess probability and impact with company response.On-going monitoring of risk events.

What are the risk and uncertainty in agriculture marketing?

Agricultural marketing experiences three types of risks namely the Physical risk, Price risk and the Institutional risk. The physical risk is the loss in the quantity and quality of the product during storage and transport like fire accident; rodents, pest and disease attack and due to improper packing.

What are the risk factors in agriculture?

According to Baquet et al. (1997), there are five distinct risk factors in agriculture: productive risk, marketing risk, financial risk, human risk, and environmental risk. Each of these plays a role in the farmer’s decision, but the relative importance of each factor has not been analyzed in recent literature.

Why is risk management important in agriculture?

Farmers need to understand risk and have risk management skills to better anticipate problems and reduce consequences. Risk affects production such as changes in the weather and the incidence of pests and diseases. Equipment breakdown can be a risk as can market price fluctuations.

What are the 5 methods used to manage treat risks?

The basic methods for risk management—avoidance, retention, sharing, transferring, and loss prevention and reduction—can apply to all facets of an individual’s life and can pay off in the long run. Here’s a look at these five methods and how they can apply to the management of health risks.

What are the four risk management techniques?

There are four main risk management strategies, or risk treatment options:Risk acceptance.Risk transference.Risk avoidance.Risk reduction.

What is risk and uncertainty?

Definition. Risk refers to decision-making situations under which all potential outcomes and their likelihood of occurrences are known to the decision-maker, and uncertainty refers to situations under which either the outcomes and/or their probabilities of occurrences are unknown to the decision-maker.

How can we reduce the environmental impact of agriculture?

Soil conservation methods, such as contour planting or no-till farming, reduce levels of soil erosion, as these methods help to keep the soil in place during heavy rains or floods, which is an increasing concern due to climate change.

What are the two situations that most concern agriculture producers?

The two situations that most concern agriculture producers are: 1. is there a high probability of adverse consequences and. 2. would those adverse consequences significantly disrupt the business (Patrick, 1992). “Risk” and “uncertainty” are two basic terms to any decision making framework. Risk can be defined as.

When does uncertainty exist?

uncertainty exists when t hese probabilities are not known. Farmers a nd ranchers make decisions i n a risky environment

What is the purpose of the first edition of Risk Analysis?

The purpose of the first edition of the book, published in 1997, was to contribute to improved agricultural decision making by explaining what can be done in risk analysis and management. Since 1997 progress has been made in risk analysis in agriculture.

What is the motivation for diversifying?

participating in more than one activity. The motivation for diversifying is based on the idea that returns from

What is market risk?

Price or market risk reflects risks associated with changes in the price of output or of inputs that may occur. after the commitment to production has begun. In agriculture, production generally is a lengthy pro cess.

Why does production or yield risk occur?

1. Production or yield risk occurs because agriculture is affected by many uncontrollable events that are often

What are the risks of a business?

Human or personal risks that is common to all business operators. Disruptive changes may result from such. events as death, divorce, injury, or the poor health of a principal in the firm. Agricultural Education, Research and Extension in India.

What is the risk of farming?

Risk in Agriculture. Risk is an important aspect of the farming business. The uncertainties inherent in weather, yields, prices, Government policies, global markets, and other factors that impact farming can cause wide swings in farm income.

What are some examples of government decisions that can have a major impact on the farm business?

Tax laws, regulations for chemical use, rules for animal waste disposal, and the level of price or income support payments are examples of government decisions that can have a major impact on the farm business.

What are the factors that affect the quality of commodities?

Weather, disease, pests, and other factors affect both the quantity and quality of commodities produced. Price or market risk refers to uncertainty about the prices producers will receive for commodities or the prices they must pay for inputs. The nature of price risk varies significantly from commodity to commodity.

What are the types of risk?

Five general types of risk are described here: production risk, price or market risk, financial risk, institutional risk, and human or personal risk. Production risk derives from the uncertain natural growth processes of crops and livestock. Weather, disease, pests, and other factors affect both the quantity and quality of commodities produced.

What is financial risk?

Financial risk results when the farm business borrows money and creates an obligation to repay debt. Rising interest rates, the prospect of loans being called by lenders, and restricted credit availability are also aspects of financial risk. Institutional risk results from uncertainties surrounding Government actions.

What are the risks of agriculture?

Agriculture is often characterized by high variability of production outcomes or production risk . Unlike most other entrepreneurs, farmers are not able to predict with certainty the amount of output that the production process will yield due to external factors such as weather, pests, and diseases. Farmers can also be hindered by adverse events during harvesting or threshing that may result in production losses. Development and adoption of innovations also add to production risk in agriculture. In India, more than 60 percent of land is vulnerable to droughts. Droughts lead to economic losses resulting from low agricultural production, loss of animal wealth, reduced nutrition and loss of health of workers.

What is the meaning of uncertainty?

Uncertainty implies a situation where the future events are not known.

Which criterion selects that act with the maximum minimum gain?

The maximin criterion selects that act with the maximum minimum gain, i.e.

How to mitigate uncertainty in agriculture?

The best way to mitigate the uncertainties faced by production agriculture is to ensure that the operation is being run by an experienced, professional farmer who makes decisions based on profitability. Variables such as weather, water, and disease that most growing operations face can be mitigated by someone who knows what he or she is doing. Before investing in any type of production agriculture, be confident that the grower will manage risk effectively to maximize your returns.

What is crop insurance?

Insurance. The federal crop insurance program in the United States is the principal instrument of American agricultural policy and insured over 366 million acres in 2015. In the U.S., crop revenue insurance is designed, rated, and underwritten by the USDA Risk Management Agency.

How do commodity futures work?

The commodity futures markets provide a means to transfer risk between persons holding the physical commodity (hedgers) and other hedgers or persons speculating in the market . Before committing to a certain crop, or allocating an amount of farmland to that crop, farmers can lock in prices with futures contracts to sell their crop at a predetermined price, ensuring they can cover production costs and make some level of profit. Futures exchanges exist and are successful based on the principle that hedgers may forego some profit potential in exchange for less risk and that speculators will have access to increased profit potential from assuming this risk.

Why do farmers use hedging?

While it comes in several, complicated forms, hedging is simply a strategy that allows farmers to reduce potential risk of price fluctuations that could occur between the time the crop is planted and the time it is harvested and ready for sell on the market . Price risk for agricultural commodities can occur for a number of reasons, including drought, near-record production, increased demand or decreased international production. The same futures markets mentioned above help a grower “hedge” against volatile commodity prices, and is one of the more well known versions of hedging in the agriculture sector.

How is crop revenue determined?

Crop revenue is determined by prices on the Chicago Mercantile Exchange and farm-level yields. The benefit of using a futures market to determine payouts is that no single actor can influence market prices. Crop revenue insurance indemnifies the deficit in the farmer’s gross revenue which results from either low yield or low price …

What is the goal of the Federal Crop Insurance Act?

Providing the ag producer with tools to manage their risks is the primary goal of the Federal Crop Insurance Act (FCIC). Premium rates and insurance terms and conditions are established by FCIC, however, the policies are delivered by the private firms who share in the risk exposure of the policies they sell.

What is the fastest expansion in crop insurance?

Without a doubt, specialty and/or organic crops are the fastest expansion in crop insurance protection. Specialty crop insurance coverage has more than doubled in recent years to 8 million acres and 16 billion dollars of liability coverage. At the same time sixty crops are now eligible for organic coverage.

What are the risks of agriculture?

Our contemporary review of the previous literature distinguished two major types of risk in agriculture. First, business risk which include production, market, institutional and personal risks. Second, financial risks resulting from different methods of financing the farm business. The relative importance of these risk sources may depend on the geographical location, government policies and legislations, the presence of formal (state owned) and/or traditional risk coping tools, type of agricultural product etc. There is a wide array of risk management tools available to the farmers to manage their risks at farm level. The adoption of these risk management strategies are heavily influenced by farmers’ risk perceptions their attitude towards risk, farm and farm household characteristics and farmers’ access to publically provided services including agricultural credit and information. An insubstantial proportion of literature also revealed farmers’ behavior of simultaneous adoption of multiple risk coping tools in managing their farm risks and therefore suggesting future studies to investigate farmers’ decisions making process in context of simultaneous adoption of the available risk coping tools.

Who said farms reduce risk?

to reduce risk. Sonka and Patrick (1984) stated that farms

What is probit model?

A probit model is used to quantify factors influencing the probability that a selected group of agricultural decision makers (producers and landowners receiving crops from a share lease) used futures or options for commodity marketing during the 1986, 1987, or 1988 marketing years.

Why is price risk important?

Price risk is especially important due to long production cycle of the cereals. Inputs for growing wheat are bought months before the harvest, but the producers are unable to affect the output price. Price volatility and yield uncertainty increase income uncertainty.

What are the factors that influence the demand for information?

Relevant economic and socioeconomic factors which impact these classes of information demands are: (1) farm size, (2) farm ownership, (3) off‐farm employment, (4) education, (5) innovativeness, (6) farm plans, and (7) farm enterprise type. A logit model is specified and estimated for each class of information and the results show major differences in the determinants of demand for general and specialized information. Results also show that information sources are generally ranked higher by larger farmers than by smaller farmers.

What is sustainable intensification?

CONTEXT Sustainable intensification (SI) is envisioned as an effective strategy for developing countries to increase farm productivity while reducing negative environmental and social externalities. The development of regionally appropriate SI options however requires accounting for the knowledge and preferences of key stakeholders. In Bangladesh, the Government has requested international donors to support the development of dry season rice expansion in the coastal region. Policies however tend to be made without adequate study of farmers’ preferences and ambitions; this can render crop intensification efforts ineffective. Understanding farmers’ preferences for alternative crops and crop management practices are therefore crucial for success where agricultural development investments aim at incorporating the principles of SI. OBJECTIVE (S) Using coastal Bangladesh as a case study– we aim to (1) quantify farmers’ preferences for alternative irrigated crop and crop management options in comparison to the status quo (land fallowing), (2) analyze whether farmers’ preferences are conditioned by concerns regarding the cost and availability of irrigation and fertilizer inputs in comparison to expected net revenues, (3) understand how the heterogeneity in preferences can be attributed to farmer and/or farm characteristics, institutional, and biophysical factors, (4) determine how much farmers’ are willing to invest in different crops and crop management options – including those reliant and not reliant on irrigation. METHODS Taking 300 farmers in two diverse coastal environments, a choice experiment (CE) was employed to explore the heterogeneity in farmers’ preferences for different dry “rabi” season intensification options (‘boro’ rice, maize, wheat and mungbean) against the status quo (dry season land fallowing after harvest of the monsoon season rice crop). Analyses included random parameter logit modeling followed by willingness-to-invest and profit simulations. RESULTS AND CONCLUSIONS Analyses revealed strong farmer preferences against rice and in favor of irrigated maize, and also in favor of rainfed or partially irrigated mungbean as an alternative to land fallowing. Irrespective of their location and environmental conditions, respondents had largely a negative preference for irrigation and fertilizer use due to high investment costs and associated production risks in the dry season. Nonetheless, a significant positive effect on their willingness-to-intensify cropping was observed where farmers felt it feasible to provide in-field drainage to limit waterlogging risks. SIGNIFICANCE The study signifies the importance of accounting for farmers’ preferences while developing context-specific SI policies. Improving agronomic investments, tenure security, market, credit and extension support are likely prerequisites, alongside targeted diffusion of stress-tolerant mungbean and maize varieties for SI in coastal Bangladesh.

What are the three risk management strategies?

To minimize the risk, farmers respond in three ways which are considered to be risk managing tools; these are production, marketing, and financial responses . This study aimed to look at the potential associations and effects of implementing multiple risk management techniques at the same time, as very limited number of research is available in this field. Stratified random sampling technique was used to collect 350 farmer’s responses from four different agro-ecological districts of Bangladesh. This study applied bivariate and multinomial probit models to investigate the effects of social and farm features, farmers’ views of disastrous risk, and their attitudes toward risk sources, as well as potential associations between diversification and agricultural credit as a risk management tool. The outcomes identified the correlation between adoptions of multiple risk management strategies and concluded that one risk management approach can convince farmers to follow another at the same time. Moreover, the outcomes observed that age, educational status, farm size, family returns, land ownership, and risk-opposed character of farmers were the most persuading aspects for adopting different risk management strategies. Besides, the results presented other interpretations and information which will clarify farmer’s actions when it comes to handling various devastating risks and will also provide the policymakers with a platform to prepare for appropriate risk managing plans concerning farmers.

How is uncertainty avoided in agriculture?

Again uncertainty is avoided by the farmer by continuing to stick to the traditional crops rather than the crops involving new innovations even if these may be more remunerative. Innovations in the activities involving biological element have more uncertainty around than and are consequently slow to be adopted. In fact, one will not be wrong if one says that keenness to avoid uncertainty is one reason for the slow rate of technological progress in agriculture as compared with that in industry.

How does a farmer react to uncertainty?

Apart from diversification and flexibility, another way in which the farmer reacts to uncertainty is through self-imposed capital rationing. Capital rationing is a general term which means a restricted flow of capital to an enterprise even when the return to it is quite high.

What are the advantages of liquid resources?

With liquid resources the farmer can take advantage of passing favourable opportunity such as highly remunerative price rise by purchasing additional resources. Another advantage of liquidity is the ability it provides to the farmer to face unforeseen contingencies such as continued crop failure and market slumps.

What is the measure of crop insurance?

Crop Insurance. Measure # 1. Diversification: Diversification means that the farmer carries on several farm enterprises simultaneously in order to avoid the dangers of having all his eggs in one basket.

What is flexibility in farming?

Flexibility means that the farming system is so arranged that farmer can without much cost, move out from one enterprise into another if economic conditions make this shift desirable. With flexible techniques, it should be possible for the farmer to switch over resources, say from beef enterprise to milk enterprise.

Why does diversification reduce variation in aggregate income?

By such diversification, the farmer hopes to reduce the variation in his aggregate income because, generally, yield and prices of all products do not vary in the same direction simultaneously. If the return from one product is low, the return from another product might be high enough to compensate for the loss.

How does buffer stock operation help farmers?

Thus by neutralising year to year fluctuations in output, buffer stock operations can bring about greater regularity in the year to year availability of crops and at the same time promote rational economic decision on the part of farmers by reducing price uncertainty.

Why is it important to distinguish between risk and uncertainty?

First, the distinction between the two terms makes it clear that the information available to a decision maker differs depending on the decision that is being made. Second, the tools and strategies used to cope with each differs markedly. The tools available to deal with risk are much more plentiful than the tools available to deal with uncertainty.

What is risk in probability?

Risk represents a situation in which probability information is available. Probabilities can be objective or subjective. Under the objective probability approach, a probability is defined as a relative frequency ratio based on a large number of cases. In this case, probabilities would not differ among decision makers. Often dice or games of chance are used to illustrate probabilities. These probabilities can be thought of as objective probabilities. Under the subjective probability approach, a probability is defined as the degree of belief an individual has that a particular event will occur. If probabilities are subjective they are also personal; two people can reasonably assign different probabilities to the same uncertain event. For example, the authors of this article likely have a different subjective probability associated with chance of corn averaging between $4.00 and $4.25 next year. The difference in subjective probabilities among individuals helps explain difference in behavior. However, it creates difficulties when seeking to model risk decisions for groups of people.

What is subjective probability?

Under the subjective probability approach, a probability is defined as the degree of belief an individual has that a particular event will occur. If probabilities are subjective they are also personal; two people can reasonably assign different probabilities to the same uncertain event.

Can economists list all possible outcomes?

Most economists would agree that there are many situations in which it is difficult to list all possible outcomes. However, they would also agree that it is possible to list at least a few of the likely options. If this is the case, we are in the world of uncertainty in which we can use scenarios and scenario analysis.


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