The agriculture sector faces several risks stemming from ever-changing weather, yields, prices, government policies and global markets. In general, the following are five types of risks the agriculture sector must mitigate:
- Production risk—Uncertain natural growth processes due to weather, disease, pests and other factors can affect the quality and quantity of crops and livestock.
- Price or market risk—The prices producers receive for commodities and the cost of inputs can be uncertain depending on the market. It can also vary greatly depending on the commodity.
- Financial risk—Debt, rising interest rates and restricted credit availability can all put agricultural businesses at financial risk.
- Institutional risk—Government actions—including tax laws, chemical use regulations, animal waste disposal rules, and the level of price or income support payments—can impact how the agriculture sector conducts business.
- Human or personal risk—Injuries, illness, death and personal relationships (e.g., divorce) can all affect farming businesses.
Since risk is an integral part of agriculture, producers must take precautions to minimize its impact on business. There are a number of strategies and tools producers can utilize to mitigate the risks they face, including:
- Enterprise diversification—Offering a variety of goods—such as crops and livestock—as well as diversification of end points (e.g., different weights) or crops (e.g., red, yellow and green peppers) can reduce income variability.
- Crop insurance—Since crop insurance transfers risk from one farmer to others, it can ensure a reliable level of cash flow while allowing for more flexibility in the marketing plan. In addition, government subsidies resulting from crop insurance can benefit producers who invest in higher levels of coverage.
- Contract production—When a producer agrees to a production contract, they must deliver a specific quality and quantity of the final product for a set price. While a major producer advantage of production contracts is a guaranteed favorable price for outcomes, the producer loses the opportunity to benefit from up-side price potential.
- New technology—New technologies—such as genetically altered seeds and precision farming—can result in decreased input costs, higher crop yields and a more cost-effective use of factor inputs.
Producers should consider implementing various farm risk management strategies and tools to minimize risk while maximizing profits. For more risk management guidance, contact us today.
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