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Credit and insurance 2014

Agricultural production is inherently subject to a variety of risks because management decisions or states of nature often generate future outcomes (either favorable or unfavorable) that cannot be predicted with certainty. The variability of these outcomes represents risk. Risk is frequently measured in terms of the probability of various outcomes.

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Agricultural producers face a variety of risks including production (yield), output price, and input price risk. Some of these risks are managed through production and financial decision-making, while others are simply accepted as costs of doing business. Some risks can be managed through a variety of contractual and insurance-related products.

Agricultural production risks ultimately impact the financial viability and sustainability of farms and ranches. Agricultural production is often coincident with high short-term credit risk because of the combination of high fixed costs, weather and disease variability, and variations in cash receipts. In an average year, annual net farm revenues may be sufficient for agricultural producers to meet principal and interest payments on debt and realize profits, but across-year revenue variability may cause farm businesses to fail because of periodic inabilities to service debt obligations. Whether an agricultural producer self-insures or uses formal mechanisms for transferring risk to others, the risk is a cost that must be effed actively managed.

Managing risk is particularly important for agricultural producers in developing economies. For example, social unrest in many developing countries is often associated with low agricultural production and incomes — especially for subsistence farmers. In addition, many developing countries depend on healthy farm economies to generate economic activity through agricultural exports. Furthermore, many social issues are exacerbated by rural emigration to urban regions. This migration increases in years of low farm production and farm business failures. Finally, many rural areas would benefit from the adoption of modern technologies, but time and financial resources are often needed to learn and adopt new technologies. Variable income levels reduce the adoption of risky new technologies, even if these technologies would improve long-term producer and societal well-being.