How Much does Risk Really Matter to Farmers?

Abstract

Agriculture is inherently risky. Farm production is a biological process subject to unpredictable weather, diseases, and biological pests. In addition, farming is spatially dispersed on heterogeneous soils. Weather and spatial dispersion particularly affect crops and grazing livestock. In contrast, confinement production of animals partially controls production risk. This biological uncertainty is a fundamental cause of agricultural price uncertainty. Price uncertainty in crops is mirrored in livestock and poultry feed price uncertainty, causing output price uncertainty even for confined livestock and poultry production. Over the past 40 years, a number of changes in the U.S. agricultural sector have further increased risk. Substitution of income payments for high price supports in federal commodity programs resulted in major crop prices being determined with markets rather than policy price floors. In addition, increasing international trade in U.S. agricultural commodities in the 1970s resulted in output prices being subject to supply and demand shifts throughout the world, as well as in this country. Increases in size of farm operations and the pace of technological change have increased the managerial complexity of farming and the need for farmers to manage risk. Urbanization of farming areas has increased conflicts with new neighbors. A final change is increased environmental and other regulations in farming that influence risk management and introduce other sources of risk. These themes of termination of commodity programs, globalization of markets, increased managerial complexity, increased neighbor conflicts, and increased governmental regulations are fundamental shifts in the risk environment of U.S. farmers over the past 50 years.