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Risk is an important aspect of the farming business. The uncertainties
of weather, yields, prices, government policies, global markets,
and other factors can cause wide swings in farm income. Risk management
involves choosing among alternatives that reduce the financial effects
of such uncertainties.
Five general types of risk are described here: production risk,
price or market risk, institutional risk, human or personal risk,
and financial 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.
- 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. 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. 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.
- Human or personal risk refers to factors such as problems
with human health or personal relationships that can affect the
farm business. Accidents, illness, death, and divorce are examples
of personal crises that can threaten a farm business.
See the recommended readings
page for reports and articles related to risk management.
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