Tuesday, 6 June 2017

Risk and Uncertainty in Agriculture

Risk and Uncertainty in Agriculture Uncertainty refers to an event the outcome of which is not certain i.e. the outcome may be one of the many possible outcomes. As such it cannot be measured. But certain probability may be attached to individual outcome. Risk on the other hand refers to the impact of the uncertain outcome on the quantity or value of some economic variable. The value of the economic variable may be on either side of the mean value. Repeated events would result different outcomes having a range of values. Thus risk refers to the variations in value of an economic variable resulting from the influence of an uncertain event. Since the variations in the value are measurable risk can be measured.

Agricultural production is an outcome of biological activity which is highly sensitive to changes in weather. Important weather variables such as temperature, humidity, rainfall, wind etc. influence the biological process directly or indirectly. For instance, low soil moisture due to poor precipitation in the pre-sowing period adversely affects seed germination resulting in reduced plant population. The poor precipitation during growth period results in stunted plant growth. Heavy rainfall during early growth period causes submersion of plants. Similarly hailstorms, wind and cyclones damage the standing crops by lodging and uprooting especially the perennials (trees and shrubs). High humidity may cause outbreak of pests and diseases. All these result in partial loss in yield and sometimes complete crop failure and hence reduced income to farmers.

 In other words, deviations in the weather variables from the normal adversely affect the crop yields and hence production and income on individual farms. As variations in weather are more a regular phenomenon crop yields are not stable. As if all this is not enough the sword of uncertain agricultural prices always hangs on the farmers’ fate. As a consequence farm incomes fluctuate violently from year to year. These variations in income are referred to as risk. The variations in income due to changes in yield are production risk and due to changes in price marketing risk. As such risk (variations) may be measured in terms of standard deviation or coefficient of variations for yield, prices and income. In business risk is treated as a cost. Once in the business one has to bear this cost. Since, risk is associated with the activity it cannot be eliminated so long the activity is carried out. It, however, can be managed i.e., can be reduced or minimized but at a certain cost. Risk management, therefore, implies minimization of income loss either by reducing variations in output or ensuring certain minimum price or guaranteeing certain level of income. It is a process of appraising and reducing risk. The ways devised to do so are referred to as risk management alternatives. These are discussed under the following heads.

I. Avoiding Risk Some of the production risks can simply be avoided. For instance, eliminating more risky enterprises would minimize risk but at the cost of decreased total production (returns). Laggards always try to avoid risk. They opt for assured though low income enterprises.

ii. Preventing Risk Many a time some risks could be prevented by taking advance action. For instance, risk of loss in crop yield due to pest attack could be prevented by following preventive pest control. The cost of this risk management alternative is the cost of preventive pest control.

iii.  Sharing Risk This alternative of risk management is quite common in India. Important example of risk sharing is the share lease of land to tenants. The production risks are shared between the landlord and the tenant in the ratio they share some inputs and the output. The cost of this alternative to the landowner would be equal to the difference between the net income tenant earns less the cash rent he would have paid for rental lease.

Iv. Transferring Risk: Risk may be transferred from one entity to another. For instance, marketing risk could be transferred to buyers by way of forward contract. It guarantees to pay an agreed price for the produce to be realized in future. The cost of this alternative is the difference in value of output at post harvest/market price less the value realized at the agreed price. Crop insurance is another example of transferring production risk to another entity i.e., insurance company. In case the crop prospects are reduced below certain minimum, proportionate indemnity is paid for the expenditure incurred. The cost of this alternative is the premium paid by the farmer.

v. Spreading Risk: Risk may be spread over a number of enterprises with varying degree of risk and of course with varying level of net income. This is known as diversification. Diversification could be in terms of mixed farming, diversified farming or even mixed cropping. The idea is not to put all eggs in one basket. It would ensure some income realization from enterprises/crops even in the event of adverse weather conditions etc. As net returns from combination of different enterprises/crops would be less than the net returns from the most paying crop (pure) the difference between the two would be the cost of this alternative.

vi. Taking Risk Taking risk could be one of the alternatives to manage risk where the management cost is nil because no attempt is made to reduce risk. The idea is to plan for maximum returns even at high risk. Innovators and early adopters are the two categories of people who always are willing to take risk. They go for high return enterprises exposing themselves to high risk.

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