Major Types of Risk Management Strategies
- Agricultural Practices
- Marketing Tools
- Financial Instruments
- Financial Strategies
Agricultural Practices
Common agricultural practices used for mitigating risk include crop rotation, diversification, irrigation, pest management, no-till methods, and the choice of hybrid or locally-adapted seed varieties.
Marketing Tools
Marketing tools include a diverse group of tactics centered on product differentiation. Farmers can differentiate their products through a number of means including: processing, the use of specific varieties, certification, and labeling.
Financial Instruments
The top four types of financial instruments used by farmers are crop insurance, marketing contracts, production contracts, and options and futures contracts.
Crop insurance is a private insurance policy guaranteed in part by the federal government. It can be used to insure crops or livestock against both market volatility (price swings) and losses due to poor weather and natural disasters. Crop insurance plans can be created to mitigate a farmer’s specific risks and overall business strategy. Crop insurance is currently available for 128 types of crops.
Unfortunately, crop insurance is not always accessible to all farmers. It can be too costly to obtain or unavailable for a crop a farmer wishes to grow. In addition, for farmers to benefit from crop insurance, they must document and verify their losses and meet a specific deductible to be able to collect an indemnity payment.
Marketing contracts allow producers and buyers to “lock in” prices in advance.
Production contracts are agreements between producers and buyers in which the producer grants ownership of the product to the buyer. The buyer is typically a contractor. The agreement is for a fixed time period.
Like marketing contracts in general,
options and futures contracts primarily address price risk. Options gives the contract holder the right to buy or sell the during a specific time period. Futures require the contract holder to accept a delivery or make a delivery of the product by the end of a specific time period.
