Risk in Agriculture
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
- 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.
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