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Saturday, 24 July 2021 16:33

Managing risk in farming: Types of risks

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Agricultural production is at risk from many potential factors, including: weather, diseases, market prices and input prices. Risk management is one tool that you can use to protect your investment.

 

What is Risk?

The term refers to “the possibility of a loss”.  Risk can not be eliminated but it can be managed to reduce its negative impact. Managing risk involves deciding which risks to accept, which risk to control and which risk to avoid. Risk management involves choosing among alternatives that reduce financial effects that can result from such uncertainties.

 

The risks of farming

As a farmer you make decisions every day that affect farming operations. Most of the factors that affect the decisions you make cannot be predicted with 100% accuracy and this is risk. Farmers need to understand risk and have risk management skills to better anticipate problems and reduce consequences. There are many sources of risks in farming and the common sources of risk in farming can be divided into five areas:

Production Risk

Marketing Risk

Financial Risk

Institutional Risk

Human Risk

 

Production and technical risk

Production risks relate to the possibility that your yield or output levels will be lower than projected.  

 

Crop and livestock performance depend on biological processes that are affected by the weather, and by pests and diseases. 

 

Excessive rainfall or too little rainfall leads to lower or no yield in extreme cases. Hail or heavy windstorms could damage or even wipe out crops. Outbreaks of pests or diseases could also cause major yield losses in crops and livestock. Production risks may also result from damage due to failure of equipment and machinery such as an irrigation pump. Fire is also one of the most common risks that cause serious losses in farming.

 

Marketing Risks

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.  Marketing risks can also arise from loss of market access due to a wholesale buyer or processor relocating or closing, or if a product fails to meet market standards or packaging requirements.

Financial Risks

Financial risks relate to a scenario of 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. 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.

 

Legal and Environmental Risks

In part, legal risks relate to fulfilling business agreements and contracts. Failure to meet these agreements often carry a high cost.  Major source of legal risk is tort liability causing injury to another person or property due to negligence. Legal risk is closely related to environmental liability and concerns about water quality, erosion and pesticide use.

Human Resource Management Risks

Human resource risks pertain to risks associated with individuals and their relationships to each other.  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.

 

Risk management

Decision-making is the principal activity of management.

The following practices need to be followed to manage production risks:

  • Purchase crop or livestock insurance coverage to stabilize income. The simplest way to manage risks!
  • Diversify enterprises by growing different crop varieties and completely new crops.
  • Expand production through more intensive growing practices or by planting more acreage.
  • Adopt risk mitigating practices such as drip irrigation, tile drainage, trap crops or resistant varieties.
  • Consider site selection - use fields less susceptible to frost or pests and rotate crops.
  • Maintain equipment and keep facilities in good working condition.
  • Keep farm records

 

In the next article we look at strategies that can be used to manage risk. 

 

 

Read more

http://www.fao.org/3/I8656EN/i8656en.pdf 

https://www.oldmutual.co.za/business/goals/run/agriplus

https://www.ers.usda.gov/topics/farm-practices-management/risk-management/risk-in-agriculture

 

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