The nation’s most successful farmers are now searching for a consistent and knowledgeable approach to risk management. Survival means farming with confidence in our rapidly changing world, filled with new, attractive farming opportunities.

There are five general types of risks: production risk, marketing risk, financial risk, legal risk, and human resources risk.

Production Risk involves the uncertain natural growth processes of crops and livestock. Weather, disease, pests, and other factors affect both the quantity and the quality of commodities produced.

Price/Marketing 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.

Legal 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 Resources Risk refers to factors related to the human interactions critical to the farm or ranch business. Human Resource Risks include employee relations, work conditions, succession issues and labor supply. Human health or personal relationships that can affect the farm business, accidents, illness, death, disability, and divorce are examples of personal crises that can threaten a farm business.

In summary, there is a broad range of risk management tools and strategies that qualify within the Extension Risk Management Education, Producer Focused Results framework. In addition to crop insurance, effective risk management involves selecting tools and approaches that reduce the adverse financial effects of the uncertainties of weather, yields, prices, government policies, global markets, human resources, and other factors that can cause wide swings in farm income or threaten economic viability. Alternative production and management strategies may create a different set of business risks, and/or may sometimes increase those risks. Effective risk management education should help producers make a comparative risk assessment of alternative production or management practices.

Reference: The above information is primarily drawn from
Baquet, Alan; Hambleton, Ruth; and Jose, H. Doug; Introduction to Risk Management (http://www.ncrme.org/docs/IntrotoRiskManagement.pdf). USDA. RMA. December, 1997.

What is Risk Management?
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