By Reagen Tibbs
Whether we know it or not, we take risks daily, sometimes even multiple times a day. Think about it; have you ever weighed the consequences of snoozing your alarm and getting those precious five extra minutes of sleep? What about taking a shortcut to work that you have not fully planned out? While these may seem like not big issues, they are still examples of taking risk. Agriculture is one of the riskiest industries and professions due to the various sources of risk that can impact a farm or even whole sector of the industry. There are strategies that producers utilize to manage and mitigate the impacts of risk on their operations. A recently published USDA report analyzed data from 1996-2020 to evaluate how producers across the U.S. utilize on-farm risk management strategies and market-based tools, as well as how they manage strategic risk across all farm types. A previous Farm Focus blog discussed the USDA’s farm typology, which is also used in for this report.
What is risk in agribusiness?
Before getting into the post, it is important to understand what risk is and the types of risks present in agribusiness. University of Wisconsin Extension outlines the three main components of risk: an event, the probability of that event occurring, and the potential outcome of that event. The more uncertainty of an event occurring, the more difficult it becomes to plan for and the greater the risk. Events can be external to the operation (such as weather, government policies, or global events) or internal to the operation (such as planting decisions, purchasing equipment, or applying an herbicide). In the context of agribusiness, there are five sources of risk: production (pests, diseases, weather), financial (debt, access to capital, equity), legal (contracts, laws and regulations, business structures), human (employees, family relations, personal health), and price/market (commodity prices, input costs, market access). An event or factor can be in multiple different sources of risk.
On-Farm Risk Management Strategies
The report begins by analyzing four main types of on-farm risk management strategies: diversification, commodity storage, using savings, and accessing credit. Diversification in the report is further categorized by producing a variety of commodities, utilizing multiple sales outlets, spreading production across different geographies, and entering other farm-related enterprises. The report shows that most farms are not diversified, and even the most diverse operations specify in only a small number of commodities. Approximately 27% of all farms had diversified commodity production, with midsize family farms (77%) and large family farms (78%) having the highest share. Only 5.6% of all farms used multiple sales outlets, with 36% of very large family farms and 35% of large family farms being the highest. Roughly 10% of farms spread their production across different geographies, with both very large and large family farms having the highest shares. Finally, 68% of all farms engaged in another farm-related enterprise, with off-farm occupation farms (79%) having the highest share.
Storing commodities is further separated in the report by use of unpriced storage either on or off farm, and use of on-farm storage. Approximately 14% of all farms used unpriced storage, and 18% of all farms used on-farm storage. Large family farms and midsize family farms had the highest shares of farms that used these storage strategies. Large family farms had the highest share for both strategies, with 50% using unpriced storage and 55% using on-farm storage.
Source : illinois.edu