What is risk in agriculture

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7 Critical Risks Facing the Agriculture Industry

  1. Extreme Weather Impacting Crops. Every year, the continental United States faces hurricanes, wildfires, floods, drought, extreme heat, icy storms — the list goes on.
  2. A Hardening Property Market. Those in agribusiness know that pricing for commercial property insurance has been steadily climbing over the last two to three years.
  3. Labor Safety Concerns. …

More items…

Full
Answer

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 are the different types of farming risk?

The USDA’s Economic Research Service identifies five different types of farming risk and provides these definitions: [17] 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 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.”

Do farm risks affect the financial status of farms?

Indeed, for many farms, their farm income is dwarfed by their non-farm income and their net worth. Consequently, reducing farm risks affecting farm prices or output will not have a significant effect on the financial status of these farms. When examining financial indicators even over long periods, farms are in extremely good financial condition:

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Why is agriculture at risk?

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 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 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 risk in production?

Production risks are the principal concern in the daily routine of the farmer, as the production process is his sole responsibility. There are many and varied risks in the production process which can reduce profitability, compared with those which may occur in the subsequent processes of marketing and consumption.


How do you manage risk in agriculture?

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 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.


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.


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 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 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 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 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.


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.


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 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 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.)


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 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.


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.


What is legal risk?

Legal risk — liability for damages that could result from the business operation, such as injury to another person or damage to another person’s property; examples include accidents, an unsafe product, or environmental damages.


What is financial risk?

Financial risk — the uncertainty associated with debt, including availability of cash in the future to repay the debt, future interest rates, the lender’s willingness to continue lending in the future and the value of collateral securing the debt.


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 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 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 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 it important to deal with different risks?

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


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.


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.


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.


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.

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