Answer:
As you think about managing risk to stabilize farm income, there are five basic sources of agricultural risk that you should address: Production, marketing, financial, legal, and human resource risks. Various tools and strategies can be used to manage each of these risks.Production risks relate to the possibility that your yield or output levels will be lower than projected. Major sources of production risks arise from adverse weather conditions such as drought, freezes, or excessive rainfall at harvest or planting. Production risks may also result from damage due to insect pests and disease despite control measures employed, and from failure of equipment and machinery such as an irrigation pump. 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 relate to 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 described earlier. 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.
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