What is Agricultural Risk?

Risk is inherent in farming and always has been. Risk will never be eliminated from farming. All one can do is manage risk more or less effectively. Over the years, farmers have devised various strategies to manage agricultural risks.

There are generally acknowledged to be five sources of risk for farmers: production, marketing, financial, legal and human resource management risks. Production risks are from natural causes, primarily adverse weather, disease and pests. Marketing risks affect how profitably one is able to sell one’s product(s) and are primarily associated with market price. Price in turn is determined largely by supply and demand and the form in which the product is offered to the consumer. But marketing risk can also be affected by a wide range of other factors, such as market access and marketing power. Financial risk affects how one obtains funding for production purposes. Interest rates, inflation, exchange rates and even the cost of inputs can affect one’s ability to obtain adequate financing. Legal risk is associated with one’s exposure to liability and social and environmental regulations. Finally, human resource risks are associated with direct employer-employee issues as well as with the death, divorce or disability of an important owner, manager or employee.

This five-fold categorization is useful for assessing one’s exposure to risk and in devising effective strategies to manage these risks. Some important sources of risk, such as the intergenerational transfer of a farming operation, are too complex to be conveniently categorized. But analyzing the five sources of risk is always the first step in creating an effective, comprehensive risk management strategy. This initial analysis will be an important part of the current risk management educational effort.

All farmers are familiar with production risk. There are many ways farmers try to mitigate production risk. For example, irrigation can minimize the impact of drought. It does require a source of water and a substantial capital investment, but it does reduce some sources of production risk. On the mainland, USDA crop insurance has for many years been a primary way in which to help effectively mitigate production risk. In areas where crop insurance is available, most farmers consider it foolhardy to try to farm without it. Indeed, in areas where crop insurance is available, lenders will not extend operating credit unless a crop insurance policy is in place.

Until very recently crop insurance was not available in Hawaii. Now this deficiency has been rectified and USDA crop insurance is available for coffee, banana, papaya, macadamia nut and nursery production in Hawaii. A primary purpose of the current risk management educational effort is to help Hawaii growers evaluate the net benefits of crop insurance as a strategy to manage production risks more effectively.