Risk Management Approaches in Agriculture

Farmers may reduce the impact of a hypothetical future sudden, accidental, and unforeseen shock by systematically identifying, analyzing, and controlling production, operational, market/price, financial, technology, regulatory, infrastructure, and human or personal risks.

Henceforth, strategically, farmers adopt several different tactics to increase (or prevent a decrease in) productivity and/or increase resilience and adaptability (e.g., personal, financial, etc.). To this combined group of tactics and systematic approaches we call agricultural risk management.¹

Some of these tactics may be focused on:

Production, Operational, Price, and Market risks

• Diversification of income sources by planting different types of crops, annuals and/or perennials and/or mixing crops with livestock rendering or fish farming, rent machinery to third parties.
• Pre-season of annual crops, being informed about market tendencies and ways to sell agricultural products that don’t rely on over-stretched value chains that minimize the farm-gate price
• Choosing a specific timing to sow/plant, maximizing market gains when selling, taking the opportunity of time-windows of opportunity when certain goods are scarce in a certain market
• Invest in irrigation, offsetting the risk of drought, and pushing the crop to its hypothetical maximum productivity potential
• Choosing the most benign location for a farm regarding exposure to flood, landslide, hours of sun, etc.
• Choosing a specific farming system (e.g., extensive farming, intensive farming, small-scale farming, large-scale farming, and all the mixes and variations that may occur, such as farming systems that include forestry, aquaculture, or livestock activities). Animals can provide fertilizers highly rich in Nitrogen and organic matter, synergizing their presence with crops and limiting costs with chemical fertilizers.

Financial and Infrastructure risks

• Budgeting to set a guiding benchmark of the farm’s operation in terms of the balance sheet, cash-flow and Profit & Loss account for the year or season
• Avoid asking for credit and coming into debt altogether
• If asking for credit, always have some reserves in cash or easily liquifiable assets in case the crop fails and the loan can’t be repaid as expected.

Institutional and Technology risks

• Identify, and understand the regulatory framework controlling their activity (e.g., limitation on the use of some types of highly polluting pesticides or fertilizers, waste disposal)
• Adopt technologies that enhance productivity, such as machinery, usage of mobile phones to receive warnings about weather events, and adoption of electronically conveyed agricultural extension services

Human or Personal risks

• Keep healthy, and avoid unnecessary physical risks, such as not respecting safety measures when using machinery or applying agrochemicals.
• If available on the market, and possible, buy health insurance coverage for farmers, and family

Behavioral mindset (i.e., either favoring risk-taking or showing aversion to it), historical experiences, and market availability may drive decision-making toward using financial risk transfer mechanisms (i.e., credit, insurance, etc.). If, in addition, these financial products are easy to access and address the needs and wants of the farmer, they may be used to offset his exposure to risks.

Insurance is extremely important in the plethora of different risk management approaches at a farmer’s disposition. Of note, especially covering production risk derived from the loss of crops, trees, animals, buildings, and machinery, due to weather events or disease. It gives the necessary peace of mind.

References:

¹ Choudary, V., Baedeker, T. and Johnson, T. (2015) Making the Risky Business of Agriculture ‘climate-smart’, World Bank Blogs. World Bank Group. Available at: https://blogs.worldbank.org/voices/making-risky-business-agriculture-climate-smart (Accessed: November 10, 2022).

Read more in the articles below:

Agriculture and Risk

Risk Management Approaches in Agriculture

Insurance – A Financial Tool to Offset and Manage Risk

Agricultural Insurance – A Financial Tool for Farmers to Offset and Manage Risk