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.
Strategies to manage production risks include:
- Follow recommended production practices.
- Diversify enterprises by growing different crop varieties and completely new crops.
- Expand production through more intensive growing practices or by planting more acreage.
- Purchase federal crop insurance coverage to stabilize income during times of loss and purchase NAP coverage for non-insured crops.
- Adopt risk mitigating practices such as drip irrigation, tile drainage, trap crops or resistant varieties.
- Consider site selection – use fields less susceptible to frost or pests and rotate crops.
- Maintain equipment and keep facilities in good working condition.
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.
Strategies to manage marketing risks include:
- Develop a marketing plan with realistic sales forecasts and target prices.
- Form or join a marketing cooperative to enhance prices and guarantee a market.
- Increase direct marketing efforts to capture a higher price.
- Market through multiple channels or outlets to reduce reliance on a single market.
- Enter into sales or price contracts with buyers.
- Spread harvest and sales over the season by scheduling planting and considering storage.
- Conduct essential market research – understand your customers’ needs and preferences.
- Purchase Whole-Farm Revenue Protection to cover unexpected decline of market prices during the growing year.
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