Farm Risk

 INTRODUCTION 

Farming is risky. Farmers  live with risk and make decision  very day that affect farming operation.

Many of the factor affect the decision that farmers make can not be predicted with 100% accuracy

weather condition change ,price at the time of harvest cloud be drop, hired labour may not be available peak times ,machinery and equipment cloud peak break down when most needed. all of these changes are example of the risk that farmers face in  management their farm as a business. al of these risk affect their farm probability.

Skillful famers and other business people generally do not become involved in risky situation unless there is chance of making money. Higher profits are usually linked with their risks..

These risky but potentially profitable situation need to managed as carefully as possible.

Risk ,risk management and information requirements

key point and summary first chapter 

sources of risk 

management risk

farmers attitudes toward risk 

information for decision making

the common source of risk farming can be divided into more than three areas.

1-production

2- marketing

3-financial 

  

Production and technical risk

  

Production risk-Derives from the uncertain  natural growth processes of crop and livestock ,both the quantity and quality of the commodities produced are affect by weather and disease

Technical risk -this is the risk associated with the evaluation of the design and production system of interest affecting the level of performance necessary to meet the stakeholder expectation and technical requirement 

 

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

Low rainfall or drought may lead to low yield. Hail or heavy rains could damage or even wipe out crops.

Outbreaks of the pests or disease could cause major yield losses in crop and livestock

When farmers plant seeds and fertilize their land they do not know to certain how much rain will fall or whether there will be a hail  storm. They do not know if there will be a problem with pest or disease, but still they must deicide whether they are going to plant crop, The resource they spend to plough , plant and fertilize their crops or tp care their livestock may not recovered.

This is why there is risk ,farmer produce without complete certainty about what will happen to their production 

Marketing risk - price and cost 

Marketing risk- is the potential for failures or losses during marketing activity ,from production.

marketing risks could include any of the following example : price product incorrectly ,  choosing wrong channel to advertise to target audience 

Price risk

Price risk -is the risk that the value of a security or investment will decrease, factor that affect price risk include earnings volatility, poor business management , diversification  is most common and effective price

Cost risk- is the most common project risks .It can arise from poor budget planning  and inaccurate cost estimation 

Cost risk is the risk of exceeding the budget for the project or failing to deliver fair value offset cost.

change in price are beyond the control any  individual farmer, the price farm  products is affect by the supply of a product, demand for the product and the cost of production.

 

Supply of the products-is number of the products that producer or seller is willing and capable to provide to buyers.

Demand for the product-is affect by consumer preference ,consumers level income ,strength of the general economy and the supply and  price of competing products.

 Cost of production- refer to all the expenses incurred in the process of creating and deliver a product or service . these expenses can include  raw material, equipment and market cost. 

Financial risk- refers to the degree uncertainty or potential financial losses inherent in an investment decision .In general  as investment risk rise , investor seek higher returns to compensate themselves for taking such risk

Financial risk occur when money is borrowed to finance the farm business  .This can be caused by uncertainly about future rate interest rate and ability to continue  to provide funds when needed and ability if the farmer to generate the income necessary  for loan payment.

Risk management 

Risk management - is the process of  identify ,assessing , and controlling threat to an organization capital, earning  and  operation, These risks stem from variety of the source , include financial  uncertainties ,legal liabilities ,technology issue ,strategic management error ,accident and natural disaster.

Decision - making is the principal activity of the management . Early in the cropping season farmer must make decision about what crop to plant and what seedling rate and fertilizer level to use.

The yield and price obtained will not know with certainly for several month or even several  years in the case of perennial crop

Farmers often have a basic understanding of how their crop will perform under dry, average and wet condition, some may have formal record of the  annual rainfall in the vicinity of their farm ,while other may just remember  the pattern over  years.

 Some farmers may a feeling about the likelihood of the dry or wet year occurring before they decide on the cropping pattern for the season   

Decision make processes -is the process of the making choices by  identifying a decision , gathering information, assessing alternative resolution. Using a step by step decision making process can help you make more deliberate , thoughtful decision by organizing relevant information and defining alternative.

Decisions a bout the farm are made in the context of the farmers goal and objective.

They guide and influence the decision the farmer make, because decision are made to a achieve  goal and objective , it is helpful for farmer to understand the essential  element of decision making.

The basic decision making process  

The goals are set : farmers look at the different ways to a achieve the goal

They evaluate the different alternative

Select the best alternative

Plant for implementation 

Review and evaluate consequence of the action 

 Risk management: the decision making list 

 

1-Setting goals  and objective . 

2-exploring opportunity for meeting goal and objective

3-Evaluating opportunity and alternative

4-selecting opportunity alternative

5-Planning and  implementing the select opportunity and alternative 

6-Reflecting on and evaluating selecting opportunity  

Steps to be following by farmers in management risk

1- Identify possible source risk  e.g. pest ,price and labour 

2- Identify possible outcomes that could occur as a result of weather ,price change e.g. low income

3-Decide on alternative strategies  available  e.g. production plan and pest control 

4-Asses consequences or result of       each possible outcome for the strategy 

5-Evaulate trade of between the cost of risk and gains that can be made  

Farmers attitude toward risk

Farmers risk attitude and risk perception are crucial  factor that affect their farm production , investment and management decision.

Risk averse farmers are less willing to take on activities and investment that have higher expected outcomes , but a carry with them risk of failure 

What is risk attitude.

According to finance and economic risk - refers to the uncertainties surrounding the outcome situation .

These outcome  can be either  positive or negative button line is that likelihood of either is unknown .

Risk is more profound when making decision investment, investors are uncertain whether their financial investment will be loses or profit  

Factors effecting farmers risk attitude and risk perception.

1-Age and education of the household head

2-Off-set farm monthly of the household 

3-landownership status and farmers access to informal credit source significantly affect farmers attitude toward risk

Factors affect risk attitude 

The  three major elements for determine risk attitude

1- Possible action

2-Possible events

3-Possible outcomes due to those action and events.

Risk attitude analysis helps balance the biases resulting from extreme end risk attitudes  

Farmers may  divided into three types

1-Risk-neutral 

2-Risk- taker

3-Risk-averse

The risk-averse- farmers try to avoiding taking risk, They tend to be cautious individuals with preference for less risky source of income.

General ,they will sacrifice some amount of the income to reduce the chance of the low income or loses

Risk -taker-are people who are open  to more risky business option. Unlike the risk-averse, risk taker choose the alternative that gives some chance of the a higher income ,even though they may have to accept a lower income.

Risk, neutral -leis between risk-averse and risk-taker position  

 Information  for decision making

Defining the problem- Take time to properly define the problem- what i the  issue to be covered, what is problem, what decision need to be taken.

Finding the information-Determine the source from where information needed for decision making can  be obtained ,what information need to be taken , who has information, why is that information being collected by the source ,which component of the problem at hand will it help

on other hand 

Good risk management decision depend on accurate information, which  in turn ,requires reliable data.

Good information is one of the most useful assets farmer can have to help make rational risk management decision.

Farm -Record 

All farmers who are able to do so should  keep record of their farm business.

Farmers who are unable to do this should consider getting assistance .

Farm record are the best record source historical production.

Farm record provide a record of past decision made by farmers regarding their performance.

These record include data information about crop yield ,livestock ,cost and income.

Farm records help  farmers to examine their past decision and the result of those decision.

Farm record also provide a picture of the risks that farmer have face in the past.

They give an  indication of the risk management decision and the consequence of those decision

Answer to many question related to risk can be found in farm records

What is the likelihood of dry years or drought and seasonal?

what is the effect of drought on yield?

Which crop have performance  best?

What  percentage of produce is sold and at harvest? 

How effective is the marketing strategy? 

While farm records provide useful information about what has happened in the past, they provide very little   information about what will happen in the future, to obtain this information farmers must look at additional source  collected by the other farmers or people that might allow them  to better understand past trend and predict future trend.

All of these areas could affect decision made by the farmers and influence risk, again, it is the role of

the extension worker to identify the source of this information and convey them to their farmers