How to reduce risk in agriculture

image

Strategies to manage production risks include:

  • Follow recommended production practices.
  • Diversify enterprises by growing different crop varieties and completely new crops.
  • Expand production through more intensive growing practices or by planting more acreage.
  • Purchase federal crop insurance coverage to stabilize income during times of loss and purchase NAP coverage for noninsured crops.
  • Adopt risk mitigating practices such as drip irrigation, tile drainage, trap crops or resistant varieties.
  • Consider site selection – use fields less susceptible to frost or pests and rotate crops.
  • Maintain equipment and keep facilities in good working condition.
In order to reduce production risks, some of the risk management strategies recommended are as follow:
  1. Enterprise Diversification.
  2. Crop Insurance.
  3. Contract Production.
  4. Evaluating New Technologies.

Full
Answer

How can the government reduce agricultural risk?

This includes payments to farmers, premium subsidies, quotas, and other federal interventions to address agricultural risk. [2] Much of the data in this Special Report were developed in early 2016. [3] There are different types of risks, as explained later in this section.

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.

How do farmers manage risk?

One of the primary ways that farmers manage risk is through off-farm income, as mentioned previously. Agricultural producers rely heavily on off-farm income to reduce dependence on making money from agricultural operations. There are many other private risk management solutions, from diversification to hedging risk through the commodities markets.

What are the specific policy recommendations on agricultural risk?

The specific policy recommendations on agricultural risk, including disasters, are discussed in Section 5. As for the alleged market failure, farmers can already buy private crop insurance covering hail, crop fires, and strong wind.

image


What are the methods of reducing risk and uncertainty in agriculture?

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


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.


What is the biggest risk in agricultural production?

As you think about managing risk to stabilize farm income, there are five basic sources of agricultural risk that you should address: Production, marketing, financial, legal, and human resource risks. Various tools and strategies can be used to manage each of these risks.


How can you manage risk using risk strategies?

In the world of risk management, there are four main strategies:Avoid it.Reduce it.Transfer it.Accept it.


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.


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 sources of risk and uncertainty in agriculture?

Agricultural risks mainly arise due to climate variability and change, the complexity of biological processes, the seasonality of production, the geographical separation of production regions and end users of agricultural commodities (Arce, 2010), frequent natural disasters, yield and price uncertainty in agricultural …


What is risk write the type of risk in agri 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 4 ways to manage risk?

There are four primary ways to handle risk in the professional world, no matter the industry, which include:Avoid risk.Reduce or mitigate risk.Transfer risk.Accept risk.


What is an example of risk reduction?

Examples of risk reduction are medical care, fire departments, night security guards, sprinkler systems, burglar alarms—attempts to deal with risk by preventing the loss or reducing the chance that it will occur.


What are the 4 risk control strategies?

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


What are the different types of risks and uncertainties in agriculture?

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.


What are sources of risk and uncertainty in agriculture?

Agricultural risks mainly arise due to climate variability and change, the complexity of biological processes, the seasonality of production, the geographical separation of production regions and end users of agricultural commodities (Arce, 2010), frequent natural disasters, yield and price uncertainty in agricultural …


What is risk write the type of risk in agri 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 is systemic risk in agriculture?

Systemic risks in food and agriculture In general terms, the risk of failure (or serious disruption) of an entire system, which jeopardizes its capacity to deliver expected outputs; 3. In food and agriculture, systemic risks jeopardize the sustainable delivery of goods and services.


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.


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.


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 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.


What is revenue protection plan?

The USDA revenue protection plan uses the change in commodity futures prices from a time period before planting to approximately the harvest month for the price risk component. If the indemnities are triggered by low prices then the crop insurance company has to compensate all of its policyholders holding the revenue insurance at the same time.


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 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.


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 are the risks of agriculture?

The United States Department of Agriculture’s (USDA) Economic Research Service identifies five different types of farming risk: human and personal risk (such as human health), institutional risk (regarding governmental action), financial risk (such as access to capital), price or market risk, and production risk (such as weather and pests). Of these, policymakers usually focus on the last two types.


How do farmers manage risk?

There are many ways that farmers, through private means, can effectively manage risk. Farmers know their operations and the relative risks better than anyone. They can make decisions that will best meet their needs as opposed to government-created cookie-cutter policies that handle risk as if agricultural producers are homogeneous in nature. When discussing risk management in agriculture, crop insurance often dominates the discussion. However, crop insurance is merely one tool to address risk. Further, it is also only one type of insurance; farmers purchase many different types of insurance, from hail insurance to property insurance. The following lists many important risk-management tools (beyond insurance), but it is far from exhaustive. Through sensible practices, agricultural risk can be greatly reduced and many potential problems connected to risk can be eliminated.


Why are farmers so well suited to farming?

Farmers Are Generally Well-Equipped to Handle the Loss of a Crop. There is a myth that agricultural risk is unique in part because farmers can be devastated due to the loss of a single crop. Farmers typically diversify their operations so that this does not happen. The USDA has developed a typology for various family farms. The four types of family farms identified that on average have positive farm earnings [41] produced an average of three to four commodities in 2011. [42] Even about half (47 percent) of low sales farms (which on average have negative farm earnings) produced at least two commodities. [43] Further, farmers should generally be expected to diversify, or to hedge their market risks, especially if they are dependent on farm earnings.


Why is it important to put risk in perspective?

Putting risk in perspective is important. By having to minimize or eliminate potential losses, a business is encouraged to develop new solutions and evolve to remain competitive. This helps the business by finding new ways to be profitable; consumers also benefit from new and improved goods and services. It also helps the economy by weeding out inefficiency and bad ideas, allowing resources to be put to better use. Riskier actions and investments can often mean greater rewards. When protected by taxpayers from risk, businesses are encouraged to remain complacent and discouraged from learning how to manage risk on their own—something farmers generally can do very well. When subsidies are present, businesses, including farms, will divert resources and attention away from risk management because taxpayers are already protecting them against risk. Further, when evaluating actions and possible investments, the level of risk can be distorted for businesses, turning an otherwise unacceptably risky and unwise action into something that may be acceptable from the perspective of a business, because it will not feel the full downside of its decision.


How much does crop insurance cost?

The commodity programs and the federal crop insurance program cost taxpayers about $15 billion a year. These are major costs, but they are only part of the problems with subsidies, as has been explained.


What is multiple peril crop insurance?

Multiple peril crop insurance is merely one way to manage risk and only one type of insurance (farmers buy other insurance, such as crop-hail insurance and property insurance). One of the primary ways that farmers manage risk is through off-farm income, as mentioned previously.


Why should agriculture be treated as a priority?

There is an underlying assumption that agriculture should receive special treatment because it is more important than other sectors of the economy. This assumption is likely due to the fact that agriculture offers a basic necessity to the public (i.e., food). Therefore, the farmer is seen as more important, for example, than the restaurant owner. The government should not, however, be in the business of picking winners and losers by figuring out what industry or business is more important than others and therefore more worthy of subsidies.


Learn from history

Stockpiling an inventory of inputs when they’re readily available is one option, but Tranel also sees the potential for a novel and yet indeed, old-school, approach: imagining substitutes. “You may have to think creatively,” he says.


get your plan in place

While the coronavirus pandemic may have increased the risks facing farmers and ranchers, it hasn’t changed the basic tenets of risk management. The tried-and-true strategies for mitigating risk begin with the development of a whole-farm risk-management plan.


1. Consider the five main sources of risk

Frame the whole-farm, whole-family plan within the context of the ever-present risks associated with finances, production, marketing, human interaction, and legal issues. These shape the overview for managing risk.


2. Take stock of your operation and its course

Get a reading of your present circumstances by asking, “Where am I?” Says Tranel: “Do an inventory of your land assets and its resources, such as water. Inventory your cow herd and line of equipment.”


3. Identify action steps

Setting near- and long-term goals lets you build a path that leads you from your present circumstances to the imagined picture you see of your farm or ranch in the future.


4. Chart a near-term and long-term course of action

Set a timeline for your goals and the triggers that will instigate each action step. “Each production period has its own timeline,” says Tranel. “If you have a wheat farm, for instance, you know that if you want to harvest at a certain time, you need to plant by a certain time.


LEARN MORE

For related content and insights from industry experts, sign up for Successful Farming newsletters. Sign up


What is risk management?

Risk = the likelihood or chance of a hazard resulting in incident or injury. In other words, the likelihood of something going wrong. The purpose of Risk Management is to eliminate or reduce risk. The process to achieve this is very simple – keep S.A.F.E. S = see it.


When determining the level of risk, use a Risk Matrix.?

When determining the level of risk, use a Risk Matrix. The matrix below is derived from the international standard for risk management (ISO31000 for those interested). By deciding on the level of likelihood and consequence, where they intersect on the matrix is the level of risk. Use the same rating system for Inherent and Residual Risk.


What is residual risk rating?

Residual Risk Rating (note: with your existing and additional controls in place, you should have reduced the level of risk. The risk you’re left with is called the Residual Risk Rating) These are suggested columns in your health and safety Risk Register – it’s up to you what you choose to include.

image

Leave a Comment