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RISK IN
AGRICULURE
AND THEIR
MANAGEMENT
BABU KANT

WHAT IS RISK?

Hardy: Risk is uncertainty about cost, loss or

Agricultural risk is associated with negative

outcomes stemming from imperfectly predictable
biological, climatic, and price variables. These
variables include natural adversities (for
example, pests and diseases).
There is time lag between production and
consumption of farm products. The longer the
time lag the greater is the risk

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damage.

CONTD

Risk contributes to the profit.

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PROFIT

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RISK

Risk is generally taken by middleman.

Whenever risk is greater and varied, margin
taken by risk bearer is higher and vice versa.
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PROBABILITY OF
ADVERSE
CONSEQUENCES
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No products to sell.

Market prices below breakeven.

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Loss of markets.

Disruption of the business.

Limited or no access to credit (borrowed funds).
Liability
Bankruptcy

TYPES OF RISK..
1.

Physical risk- Includes loss of quality and

2.

Price risk - Prices may change from year to year,

Changes in prices may be upward or downward.

Factors affecting the demand for, and supply of,
agricultural products are continuously changing
causing price risk

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month to month, day to day and even on the same

day

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quantity during the marketing process.

CONTD
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Institutional risk - Include the risks

arising out of a change in the government's

policy, in tariffs and tax laws, in the movement
restrictions, statutory price controls.

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SOURCES OF RISK..
1.

4.

1 Production risk Agriculture is often

charterised by high variability of production
outcomes.
Producer cannot predict with certainty the
amount of output their production process will
yield due to external factors like weather pest
and disease.

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3.

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2.

Production risk
Financial risk
Market risk
Legal risk

CONTD..

In this respect, agriculture has its own peculiarities,

Many agricultural production cycles stretch over long
periods, and farmers must anticipate expenses
they will only be able to recuperate after marketing
their product. This leads to potential cash ow
problems, which are often exacerbated by lack of
access to credit and the high cost of borrowing. These
problems can be
classified as financial risk.

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2- Financial risk- The ways businesses finance their

activities are major concern for many enterprises

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RISK
MITIGATION
PRACTICES

Speculation

Hedging

Contract farming

Insurance

Government policies

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Diversification
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WHAT IS SPECULATION?
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Speculation- Purchase or sale of a commodity

at the present price with the object of sale or

purchase at some future date at a favorable price.

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It is not regular trading and trader has sole

objective of profit making
Difference in price prevailing at two time (sale
and purchase) constitute profit or loss

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CONTD..

They devote their whole time and energy to the

collection of information about the future course
of price movements.

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1. Speculation Proper-Prefers to
speculation on the part of a person who makes
it his profession.

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Is beneficial for the economy as a whole and is

usually accepted by the society
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CONTD.
Illegitimate Speculation- Is a gamble in

Speculators adopt such manipulative practices as

create conditions of artificial scarcity in the
market and lead to a rise in prices.

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business

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Is not based on any rationale, though it

inuences the prices of products.
Is prohibited by the government in the best
interest of the economy

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ECONOMIC BENEFITS OF SPECULATION

2.

Price differentials in different markets

are bridged to some extent.

3.

Helps in the adjustment of supply of, and

demand for, commodities at normal
prices.

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Speculation dampens price uctuations.

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1.

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WHAT IS HEDGING?
Hoffman: Hedging is the practice of buying or

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selling future in future to offset an equal and

opposite position in the cash market and thus
avoid the risk of uncertain changes in prices.

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Is a trading technique of transferring the price

risk.
Protects the traders from extreme crash in prices
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ASSUMPTION FOR
HEDGING

a) The future and cash commodity prices move

up and down together, i.e., the basis of price
changes remains unchanged.

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Hedging is based on two assumptions:

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b) Mechanics includes the making of

simultaneous transactions, but of opposite
nature, in the futures and cash markets.
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BENEFITS OF
HEDGING

b)

Enables him to keep the trade margins at a

lower level because there is no risk;

c)

Facilitates the financing of inventories of stored

commodities to the maximum possible extent.

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Protects the hedger from sustaining loss and

enables him to earn his normal trade profit;

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a)

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CONTRACT FARMING

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A contract is a legal agreement between buyer and seller and

can be used to reduce marketing risk with inputs and outputs.

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Contract farming is a written commitment or an agreement

made between the farmer and the buyer for cultivation and
sale of specific quality, quantity, grade, and variety of
commodity at predetermined price.

A producer can forward contract with an input supplier for

future delivery of the input at a specific price.
Such a contract would protect the producer from higher costs
if input prices increase. However, if input prices fall he is still
required to pay the contracted price.

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INSURANCE ..

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The purchase of certain types of revenue insurance

can also reduce marketing risk. Depending on the
specific type of agricultural enterprise and
individual farm characteristics.

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An arrangement by which a company or the state

undertakes to provide a guarantee of compensation
for specified loss, damage, illness, or death in
return for payment of a specified premium.

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Several of the current government programs

designed to help farmers include numerous
producer price support programs for various
commodities and other agriculture related
activities. Example Ganga Kalyan Yojna (KJY),
pradhanmantri Fasal Bima Yogna.

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Understanding and participating in government

farm programs can also help reduce marketing risk.

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GOVERNMENT
PROGRAMS

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