Risk Management: From the Researcher to the Farmer

Summary

The agricultural industry is in the midst of a major period of structural change creating a great deal of uncertainty for producers concerning the appropriate portfolio of production and marketing activities for the future. Our challenge as academics and advisors of producers is to produce research and educational programs that will assist farmers manage risk and remain competitive in this increasingly dynamic industry environment. We briefly review the current research on risk management, the sources of risk for farmers, and the alternative strategies for farmers to manage and control their exposure to risk. We then describe the current approach to providing educational programs on risk management and the available evidence that farmers are adopting recommended strategies. Our analysis suggests more farmers are adopting tools to shift some of the short-run risk, but that they have been less receptive to adjustments in their strategy to deal with longer-run changes. We also suggest some implications that seem to follow from this overview: (1) extension education programs to assist farmers choose among the crop insurance alternatives seem to be working well, (2) educational efforts on the use of the futures and options markets are being widely accepted and the use of these markets by farmers is increasing, (3) the strategic planning approach has the most potential to help producers evaluate and manage longer-run or strategic risk but educational programs have not been well attended. We suggest three types of assistance to enhance farmer participation in strategic planning: (a) public assessment of the forces driving change and the implications of those changes for farms, (b) provision of efficiency standards or benchmarks to help farmers appraise whether they can compete with other producers, and (c) provision of multiple-day workshops on strategic planning spread over several months to allow time to reflect and prepare for each step in the strategic planning process.