What is production risk in agriculture


Some Sources of Production Risk

  • Weather and wildfire
  • Pests and disease
  • Production management – planting, harvesting, food safety
  • Infrastructure (on-farm and off-farm) malfunction

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.Jun 30, 2020


What is the risk in agriculture?

Risk in Agriculture. 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. Financial risk results when the farm business borrows money and creates an obligation to repay debt.

How to manage production risk in farming?

Proper utilization of the leasing arrangements can be a suitable alternative for managing the production risk. In case of a crop share or livestock share lease arrangement a farmer is able to shares production risk with the landowner. For example, under a crop share agreement, the landowner receives a portion of the crop yield as rental payment.

What is production risk and why does it matter?

What Is Production Risk? Anything that directly affects the quantity and quality of your production or causes variation in expected yield. If you’ve been farming for even a little while, you are probably well-versed with production risk. Jump directly to resources.


What is a production risk?

Production risks relate to the possibility that your yield or output levels will be lower than projected. Major sources of production risks arise from adverse weather conditions such as drought, freezes, or excessive rainfall at harvest or planting.

What is an example of production risk?

For example, a producer who operates a dairy and raises corn is not completely dependent on one product. Thus, his risk of a complete production loss due to an early frost would be less than a farmer who only grows corn. With diversification, choosing low-risk enterprises can also help reduce overall production risk.

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.

How do you manage production risks?

Tools for Mitigating and Planning for Production RiskDiversify crops or enterprise.Change production methods.Use lease arrangements with crop or livestock shares.Invest in new technologies.Maintain farm infrastructure and equipment.Use protected cultivation.Stay informed.Site selection.More items…

What is production risk assessment?

A Risk Assessment is an examination of what could cause harm on a particular shoot or at a specific location, so that the production company / producer can decide whether adequate control measures are in place to prevent harm.

What is a production or technical risk?

The technical and production risks themselves are of an industrial and environmental nature. The effect of these risks may affect the production volume, the need to repair damaged assets, and reimbursement for the damages inflicted on third parties and the environment.

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 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.

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 is price risk in agriculture?

It is common for agricultural households in developing countries to face unstable food prices, which are closely correlated with food production. Price risk, often referred to as market risk, is linked to price fluctuations for finished products and inputs [14].

What is input supply risk?

The risk associated with a change in raw materials or input to a project from those assumed or projected.

What is demand risk?

Demand risk is a potential hazard that all businesses must be facing during normal operations. Each business relies on forecasting tools to understand what quantity of a product it should produce.

What is crop insurance?

Crop Insurance Crop insurance refers to an insurance which protects farmers and crop producers against their loss of crops due to natural disasters, such as hail drought, and floods. The insurance covers pre-sowing and post-harvest losses due to cyclonic rains and rainfall deficit.

Why is production output important?

Production output is the main source of revenue for agricultural operations, hence it becomes very important for the farmer to timely identify the production risk and adopt the management tools, and which tools a farmer uses, depends mostly on his individual farm situation and risk-bearing willingness and ability.

Why is it important to deal with different risks?

Dealing with different risks is therefore essential so as to maintain profit margins

What Is Production Risk?

Anything that directly affects the quantity and quality of your production or causes variation in expected yield. If you’ve been farming for even a little while, you are probably well-versed with production risk.
Jump directly to resources.

Some Questions to Ask to Assess Your Production Risk

Which of the listed risks affects me by keeping me from getting to my goals?


Risk has always been part of the business of agriculture. It’s an industry built on the unpredictable forces of nature. What looks like a promising crop or herd can suddenly fall victim to the weather, insects or disease.

Complete Chapter List

Efficiency assessment in agriculture is a research field were quite important methodologies have been implemented. Data Envelopment Analysis (DEA)…

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 contract production?

Contract production is normally associated with vertical integration, where an agribusiness firm coordinates all aspects of a product from production to the consumer’s table. Contract production is common in poultry and livestock production. The agribusiness firm provides feed and other inputs to the producer, who manages the grow-out process.

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.

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.”.

Is crop insurance regulated by the federal government?

It is clear that farmers are relying on this product to get them through tough times. However, because such crop insurance is regulated by the federal government, agribusiness is at the mercy of changing political tides. “The federal government writes the rules and sets the rates,” explained Mossman.

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.

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 the 2014 Farm Bill?

The 2014 farm bill, like previous farm bills, provides farmers various direct and indirect subsidies ostensibly aimed at addressing various risks. [3] These subsidies include commodity programs, such as the new shallow loss program that protects farmers from even minor losses they might incur, and the federal crop insurance program, which shifts almost all risk to taxpayers by forcing them to subsidize on average about 62 percent of the premiums that participating farmers pay for the program. (For a more in-depth discussion of commodity programs and crop insurance, see Sections 3 and 4, respectively.)

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.

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 given special treatment?

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.

When did crop insurance start?

In 1980 , Congress passed the Federal Crop Insurance Act, which established the federal crop insurance program as the primary form of providing disaster protection for farmers, providing premium subsidies for farmers to purchase multiple peril crop insurance. Crop insurance has been a failure.

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 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 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.

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.

What are the risks associated with human resources?

Human resource risks pertain to risks associated with individuals and their relationships to each other. These relationships include those with family members, as well as farm employees and customers . 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.

What are the legal risks?

In part, legal risks relate to fulfilling business agreements and contracts. Failure to meet these agreements often carry a high cost. Another major source of legal risk is tort liability – causing injury to another person or property due to negligence. Lastly, legal risk is closely related to environmental liability and concerns about water quality, erosion and pesticide use.

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.

Why is risk in agriculture so difficult to recognize?

Research background: Risk in agriculture is a difficult concept to recognize, because farmers are exposed to different types of risks that influence their agricultural activity.

What is risk management in agriculture?

Risk management is an integral part of good management of a farm, being a way to avoid losses and exploit opportunities.

How do tropical forests contribute to the economy?

The potential is rapidly growing for carbon markets to deliver private and public compensation for emissions reductions from forest protection at national and subnational scales . Nevertheless, monetization of forest ecosystem services remains scant, leaving forests vulnerable to conversion to other land uses in the short run. We develop a real options framework for a representative farmer’s land-use decisions, identifying a value gap between private short-term incentives versus long-term benefits from carbon market compensation, given uncertainties over future values for emissions reductions from forest protection. A quantitative illustration of this framework for Mato Grosso, Brazil, demonstrates that forest conservation coupled with cattle ranching intensification is competitive with the predominant practice of extensive cattle production, but is hindered by landholders’ perceptions of the relative option values to different land uses. We show how bonds, call and put options allow for early monetization of part of potential future carbon revenues, even under uncertainty, changing incentives at the landholder level and jumpstarting conservation and more efficient models of agricultural production. These approaches provide a model for addressing the financial needs of farmers on the ground to accelerate the transition towards low-deforestation rural development at large scales.

What is the purpose of the national agricultural policies and CAP?

Methods: The national agricultural policies, as well as CAP are aimed at compensating farmers for the negative effects , however it is not so easy to govern and implement the tools on the farm level. The paper provides a comparative analysis of selected tools that are the most suitable for Slovak agricultural producers.

Is corn a staple crop?

[4] . Corn is a staple crop with very low risk thus attractive for farmers to be cultivated [5].


Leave a Comment