Risk and uncertainty are inescapable factors in agriculture. Types of risk include production risk, from the weather, crop and livestock performance, and pests and diseases, as well as government controlled institutional risks, and personal or human risk. Together with price or market risks, these constitute business risk which is further related to financial risk. Dealing with all these types of risk systematically, whether for farmers, researchers or policy makers, is difficult.
There are two reasons why risk in agriculture matters. First, most people dislike risk because they are risk averse when faced with significantly risky incomes or wealth outcomes. A person who is risk averse will be willing to forgo some expected return for a reduction in risk. Evidence of farmers’ risk aversion is to be found in many of their actions, such as their willingness to buy certain kinds of insurance. Second is the issue of downside risk. This refers to those situations in which significant deviations from the ‘norm’ more often lead to worse outcomes than to better ones. The yield of a crop, which depends on a large number of variables such as rainfall and temperature, provides an obvious example. Large deviations of these variables in either direction from their expected values tend to have adverse effects.
Risk management is the systematic application of management policies, procedures and practices to the tasks of identifying, analyzing, assessing, treating and monitoring risk. For any organization, whether a large corporation, a government agency, or a family farm, risk management is, or should be, an integral part of good management. It is a way for an organization to balance the chances of serious losses against the opportunities for profit-making. Risk management is not a set of procedures that are followed, once and for all, to ‘inoculate’ the organization against risk, since that is impossible in a turbulent world. Rather it is a continuous, adaptive process that needs to be integrated into all relevant aspects of the decision-making procedures of the organization.
This postgraduate course is designed as a guide to the field of risk management in agriculture and its methods. It consists of basic and applied lectures and demonstrations, supported by variety of illustrative practical exercises.