What is Risk Management?

Risk has always been a part of agriculture. But farming in America has changed dramatically over the past decade. Increasingly, farmers and ranchers are learning that agriculture today is full of new rules, new stakes, and most of all, new risks.

The nation's most successful farmers are now searching for a consistent and knowledgeable approach to risk management. Survival means farming with confidence in our rapidly changing world, filled with new, attractive farming opportunities.

There are five general types of risks: production risk, marketing risk, financial risk, legal risk, and human resources risk.

  • Production Risk involves the uncertain natural growth processes of crops and livestock. Weather, disease, pests, and other factors affect both the quantity and the quality of commodities produced.
  • Marketing Risk refers to uncertainty about the prices producers will receive for commodities or the process they must pay for inputs. The nature of price risk varies significantly from commodity to commodity.
  • Financial Risk results when the farm business borrows money and creates an obligation to repay debt. Rising interest rates, the prospect of loans being called by lenders, and restricted credit availability are also aspects of financial risk.
  • Legal Risk results from uncertainties surrounding government actions. Tax laws, regulations for chemical use, rules for animal waste disposal, and the level of price or income support payments are examples of government decisions that can have a major impact on the farm business.
  • Human Resources Risk refers to factors such as problems with human health or personal relationships that can affect the farm business. Accidents, illness, death, disability, and divorce are examples of personal crises that can threaten a farm business.

Baquet, Alan; Hambleton, Ruth; and Jose, H. Doug; Introduction to Risk Management. USDA. RMA. December, 1997.