What is agricultural risk

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.

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.Jun 30, 2020


What is the financial risk in agriculture?

Risk in Agriculture. 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 is risk management in agriculture?

Risk 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.

What are the risks of Agri-agriculture?

Agriculture does face risks that can impact production, such as severe weather and pests. However, other industries can also have production negatively impacted by a wide variety of risks, such as shifts in demand and problems with critical inputs, including inputs affected by weather, natural disasters, and “acts of God.”

What is institutional risk in agriculture?

Institutional risk results from uncertainties surrounding Government actions. 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 is agricultural marketing risk?

Marketing risk, which could also be referred to as price risk, deals with uncertainty about commodity prices and the possibility of a change in prices that would adversely affect the farmer. Agricultural producers have little control over the market forces that drive commodity prices.

How can we reduce agricultural risk?

In order to reduce production risks, some of the risk management strategies recommended are as follow:Enterprise Diversification.Crop Insurance.Contract Production.Evaluating New Technologies.

What is risk of agricultural engineering?

In the context. of agriculture engineering, risks are classified as tangible. and intangible objects ranging from land, people to lack of. information and communicatoin networks.

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.

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

We include five general types of risk in agriculture (Harwood et al., 1999; Hardaker et al., 2004): 1) production, 2) market, 3) institutional, 4) personal (also called human or idiosyncratic), and 5) financial.

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 4 high risk factors to farm?

This includes headaches, poisoning, burns, birth defects and even some form of cancer. Even though chemicals are dangerous, machinery is the highest risk factor to farmers. Tractors are the most dangerous causing the two main types of accidents: rollovers and runovers.

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.

How do you handle 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 risks of agriculture?

The five general types of risk in agriculture are as follows: 1. Production risks stem from the uncertain natural growth processes of crops and livestock, with typical sources of these risks related to weather and climate (temperature and precipitation) and pests and diseases.

Why is production risk important in agriculture?

These experiments permit a better understanding of cause and effect. For example, the analysis of long-term agronomic trials can help identify how weather variability affects crop yield stability. Moreover, farmers often perceived production risks as being one of the most important types of risk ( Table 3 ), but this perception is context specific with surveys from farmers in Europe often suggesting policy uncertainty as a major concern. The focus on market risks is also reasonable. Markets, prices, and price volatility are at the center of theories and models developed in agricultural economics. Researchers have recognized the importance of risks beyond production risks (such as market prices), but the rate of increase in studies on multiple risks was less than the rate of increase in studies on single types of risk over the past two decades. The literature has focused less on institutional, personal, and financial risks, compared with production and market risks. The focus on production and market risks may also be related to the greater availability of open access data on weather and prices ( Woodard, 2016; Coble et al., 2018 ). This focus has in turn shaped the methods available to study risk. Only a limited number of studies examined personal risk. One example was Zhen et al. (2005) who reported survey results from 270 farmers that implied cropping systems on the North China Plain are economically viable. These farmers also reported the over use and inappropriate handling of mineral fertilizer and pesticides, resulting in 20% of farmers reporting headaches and fatigue. These health problems are a concern for human welfare and may affect agricultural production through reduced work productivity. Quantifying these human health problems is a challenge, but identifying the risk is an important first step in quantifying the cost of the risk.

How many studies have been conducted on the risk of agriculture?

Starting with a literature search in the Web of Science, we identify 3283 studies on types of risk in agriculture. Unexpected events continue to effect farmers and we know that farmers manage multiple risks jointly. Thus, our study focuses on the distribution of studies by type of risk (production, market, institution, personal, and financial) and the number of studies that examined more than one type of risk. Our results reflect the types of risk that researchers have studied and do not necessarily reflect the importance of different risks as perceived by farmers. We found only a limited number of studies that examined multiple sources of risk. This limited number means that there may be opportunities to better align risk research with the needs of farmers who manage multiple risks jointly, and the agencies, institutions, and donors that work to support them. Adopting a multi-risk research agenda faces challenges, including the intense data requirements needed to understand how risks are connected. One pragmatic approach, among several options, is to use simulation models that combine observed data on weather variability and price volatility with the design of “what-if” scenarios related to institutional, personal, and financial risks. Some simulation models consider market risks through the use of a sensitivity analysis, but we require greater understanding of how to better account for the stochastic dependencies between types of risks and the probability distributions of variables for risk types, especially given the differences between the frequentist and subjectivist views on probabilities. Moreover, to use simulation models and conduct scenarios for combinations of types of risk, data on the effects of all the types of risk are required. Our results also highlight that the types of risk are often relevant at differing scales (farm versus farm household), with personal risks often stemming from the farm household scale (such as personal illness or changes in family relationships) but negatively effecting farm operations. This scale issue highlights the need for risk research to consider the interactions between on-farm production activities and household family members. Despite these challenges, our study raises the awareness of the apparent disconnect between risk research and the multi-risk realities encountered by farmers and policymakers. This greater awareness is a first step towards developing a research agenda that overcomes technical challenges in analyzing multiple risks, such as the stochastic dependencies between types of risk, and provides much needed information to farmers and policymakers regarding risk management priorities.

What are the risks faced by farmers?

Farmers have always faced multiple risks; for example, in premodern Iceland major concerns for farmers included weather variability and personal illness ( Eggertsson, 1998 ). Campbell et al. (2016) argue that the growing number of studies that focus almost exclusively on the link between weather variability and crop yields provide only marginal increases in knowledge and by only studying one risk we only gain an inadequate picture of all the types of risk farmers encounter. The implication of this argument is that analyses of multiple concurrent sources of risks are likely to generate more useful insights. The IPCC (2019) reinforces this view by discussing how diverse types of risks co-occur or reinforce each other and how such co-occurrence can limit the effectiveness of adaptation planning for climate change. The IPCC indicates a possible remedy may be policymaking that considers multiple risks. Other researchers have also argued that the risks associated with climate change, economic volatility, globalization, and political instability have become more pronounced and severe ( Barrett and Constas, 2014; Darnhofer et al., 2016; Hansen et al., 2019 ). Whether farmers’ exposure to risks, in general, has increased over time remains an open question as the quantitative evidence seems mixed and context specific, especially for weather and commodity prices ( Rajeevan et al., 2008; Gilbert and Morgan, 2010; Wildemeersch et al., 2015 ). However, unanticipated events with considerable impacts on farmers continue to occur ( Just, 2001 ), which suggests that the nature of risk has changed over time. The challenges to the agricultural sector from a growing world population, from changing diets with higher demand for animal-source foods, and from climate change, make managing multiple risks more important than ever.

How do farmers perceive risk?

Among the 18 studies that considered all five major risk types, most examined how farmers perceive the importance of each type of risk using a ranking-based Likert scale. The importance of risk is context specific; for example market risks contributed more than production risks in explaining revenue variability among Californian and New Zealand farmers ( Blank et al., 1997; Beukes et al., 2019 ). However, blueberry farmers in Chile were more concerned about production risk than market risk (sourced from price volatility) ( Lobos et al., 2018 ). The studies on risk perceptions indicate that farmers make important distinctions between issues at the farm scale and farm household scale, with health risks for household members generating issues for the farm. Further, several studies reported that concerns about family relationships (including divorce) and the health condition of family members are important issues for farm households ( Meuwissen et al., 2001; Lobos et al., 2018 ). Some of the 18 studies also canvassed the importance of risk management options. The farm scale versus farm household scale issue emerged again with off-farm income being one risk management option ( Flaten et al., 2005 ). Using off-farm income is especially important in response to institutional risks, such as the hypothetical ending of all Common Agricultural Policy payments ( Weltin et al., 2017 ).

What percentage of studies considered only market risks?

Among studies that examined only one of the five risk types, market and then institutional risks were the next most widely examined. Thirteen percent of the total sample (434 studies) considered only market risks, but only 2.4% of all studies (79 studies) considered only institutional risks.

Why shift research focus to multiple risks?

A shift in research focus to multiple risks may help prioritize risk management.

What are the risks of agriculture?

Agricultural producers might face the risk of drought, hail damage, flooding, frosts, unseasonal weather, crop destroying pests and diseases . This has been made worse by the already noticeable effects of climate change: Weather events such as drought, hail and torrential rain are likely to become more frequent, depending on the region.

How effective is agricultural insurance?

Agricultural insurance remains one the most effective ways to manage your risk. We start by assessing the risk and finding the right parameters to measure it. We offer an optimized solution for any agricultural risk you might have, which might include a variety of parametric covers based on yield or weather indices, among others. Agricultural insurance can serve a lot of business targets, including the stabilization of income and enhancing financial credit-worthiness.

Why is it important to manage negative cash flows in farming?

Managing the inevitable negative cash flows inherent in farming due to regular upfront input costs is vital to profitable operation. Obtaining the necessary loans is needed to protect cash flow and productive assets. This is easier said than done if the right safeguards are not in place.

How does farming affect economics?

Economic viability of farming can be severely impacted by adverse price movements on commodity markets . Price declines can be 30% or more in a short period of time, thus eating up annual profits. It can also be negatively affected by changes in costs of production such as unanticipated increases in fuel expenses.

Does smart farming require technological upgrades?

Additionally, the steady advances in smart agriculture, particularly with regards to precision farming, can necessitate costly technological upgrades.

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.

What is marketing in agriculture?

Marketing is that part of your business that transforms production activities into financial success. Unanticipated forces, such as weather or government action, can lead to dramatic changes in crop or livestock prices. As agriculture moves towards a more global market, these forces stem increasingly from world factors. When these forces are understood, they can become important considerations for the skilled marketer.

What are the legal issues with family farms?

Often, through lack of attention, sole proprietorship is automatically chosen . However, alternative entities exist including partnerships, limited partnerships, limited-liability companies, and corporations (both Subchapters C and S) as well as a wide variety of trust arrangements. In addition, many States, and the Federal Government, have special statutory provisions for farms meeting certain criteria, such as a family farm.

What is contract in agriculture?

A contract is any agreement (written or verbal) where the parties exchange mutual promises in return for some sort of consideration or benefit.

What is crop insurance?

Crop insurance is an example of a risk management tool that not only protects against losses but also offers the opportunity for more consistent gains. When used with a sound marketing program, crop insurance can stabilize revenues and potentially increase average annual profits.

How to manage market risk?

Managing market risk begins with a marketing plan. The goals and objectives of your business should drive the marketing plan. An accurate understanding of production costs is a critical part of a sound marketing plan for you and for professionals you work with. There may be times when the market price fails to cover all of the costs associated with production. A break-even price should serve as an important reference, even though it is usually not your desired price.

Is there more to risk management than buying insurance?

There is a lot more to risk management than buying insurance. But, insurance can complement many other risk management tools. Knowing these interactions in risk can help you get more value from your insurance dollar.

What are the risks of agriculture?

Here’s a look at some of the key critical risks facing the agriculture industry, from a hardening property insurance market down to a rise in severe weather and more.

What are the risks that farmers face?

Much of the reasoning behind this is related to the global risks farmers face: first, the increased pressure placed on American farmers from foreign production of corn, soybeans and wheat; and second, trade wars and tariffs with China contributing to a lag in the purchasing of U.S. product, including top commodities like corn and soybeans.

How does a bad storm affect livestock?

One bad storm can destroy an entire crop or demolish livestock’s living quarters — not to mention devastate a farmer or agribusiness operator’s home and other physical assets like tractors and machinery.

When did the Federal Crop Insurance Act start?

Many in agribusiness are familiar with the Federal Crop Insurance Corporation (FCIC) and the passage of the Federal Crop Insurance Act in 1980.

What are the effects of trade wars with China and supply chain disruption?

Trade wars with China and supply chain disruption due to COVID-19 have also diminished farmers’ ability to ship products overseas.

Why are farmers looking for ways to broaden their reach and expand their business?

To keep on top of changing times, many farmers and others in the agriculture space are looking for ways to broaden their reach and expand their business.

Is agriculture an international marketplace?

“Trade is a huge deal,” said Mossman. “Agriculture has become an international marketplace, and what’s going on internationally affects us.”.

What are the risks of a farm?

Financial risks relate to not having sufficient cash to meet expected obligations, generating lower than expected profits, and losing equity in the farm. Sources of financial risk commonly result from production and marketing risks described earlier. In addition, financial risks may also be caused by increased input costs, higher interest rates, excessive borrowing, higher cash demand for family needs, lack of adequate cash or credit reserves, and unfavorable changes in exchange rates.

What are the risks faced by farmers?

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 to manage risk on a farm?

Managing risk starts with identifying the most crucial risks you face; understanding the potential impacts and likelihood of undesirable outcomes ; and, identifying and taking possible steps to mitigate or lessen the impacts . It’s unlikely any one person understands all the areas of risk faced by a family farm. If you don’t know the answer or find it difficult to initiate risk management planning on your own, get assistance from Cooperative Extension, USDA, attorneys, bankers, insurance agents, and other service providers .

What are the risks of production?

Major sources of production risks arise from adverse weather conditions such as drought, freezes, or excessive rainfall at harvest or planting. Production risks may also result from damage due to insect pests and disease despite control measures employed, and from failure of equipment and machinery such as an irrigation pump.

What are the risks of marketing?

Marketing risks relate to the possibility that you will lose the market for your products or that the price received will be less than expected. Lower sales and prices due to increased numbers of competing growers or changing consumer preferences are common sources of marketing risk.

How to manage legal risks?

Strategies to manage legal risks include: Review business insurance policies and carry sufficient liability coverage. Choose a different business legal structure – as an example, a sole proprietorship is not always best. Understand business contracts and agreements – ask questions if you are unsure.

What are the sources of human resource risk?

Key sources of human resource risk arise from one of the “three D’s” — divorce, death, or disability. The impact of any of these events can be devastating to a farm. Human resource risks also include the negative impacts arising from a lack of people management skills and poor communications.

How ARC & PLC Programs Work

Under the 2018 Farm Bill, farmers and landowners can choose between three commodity title alternatives: ARC-CO (payment based on county revenue), ARC-IC (payment based on individual farm revenue), and PLC (payment based on market year average). Program details for each are outlined below.

Program Eligibility, Election, & Enrollment

All farm producers with interest in the cropland must make a unanimous election in 2019 of either ARC-CO or PLC on a crop-by-crop basis. Farmers can also choose Individual Agriculture Risk Coverage (ARC-IC) for all covered commodity base acres on a farm.

Program Details

Covered commodities include wheat, oats, barley, corn, grain sorghum, rice, soybeans, sunflower seed, rapeseed, canola, safflower, flaxseed, mustard seed, crambe and sesame seed, seed cotton, dry peas, lentils, small chickpeas, large chickpeas, and peanuts.

Find Your Local Service Center

We are committed to delivering USDA services to America’s farmers and ranchers while taking safety measures in response to the pandemic. Some USDA offices are beginning to reopen to limited visitors by appointment only. Service Center staff also continue to work with agricultural producers via phone, email, and other digital tools.

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