Just what farmers do to moderate the effects of risk is remarkably similar at all economic levels and throughout the world (box 11.2). The specific components of these mechanisms—and the degree and formality with which farmers employ them—vary. The more informal mechanisms for coping with risk may reduce the farmers’ incomes (for example, diversification may come at the cost of specialization and higher incomes). Any government intervention targeting risk must take into account how farmers’ risk management mechanisms are applied as well as farmers’ resource base. Risk management approaches can be distinguished according to whether they are undertaken before (mitigating) or after (coping) an event. They may also vary depending on whether risk is viewed primarily as an individually experienced phenomenon (idiosyncratic) or a more widely experienced event (systemic). Box 11.2 Risk management approaches of farmers and other rural producers Rural producers and communities employ several mechanisms to deal with the risky business of farming, and any interventions must account for the likely effect on these mechanisms and the resources available to farmers. Mechanisms include: Information gathering: - Using and improving information available in decision making, such as market prices, regional rainfall probabilities, new crop varieties, and emerging markets.
Avoiding risks: - Adopting a precautionary stance, with the costs balanced against the possible reduction in serious negative consequences.
- Using less risky technologies, such as growing lower but reliably yielding drought-resistant crops or producing crops with more stable markets over crops with potentially higher but less certain returns.
Diversification: - Diversifying production systems through planting a variety of crops for separate markets to mitigate climatic, disease, pest, and market vulnerability.
- Acting with flexibility to adjust to changed circumstances, reflecting physical assets and markets.
- Financing farm activities with credit, and borrowing in cash or in kind based on social capital.
Sharing of risk: - Using informal and formal insurance through making small investments expected to provide returns only in the event of difficulty or catastrophe, such as cash or gifts, or “banking” through social capital.
- Pooling risk in formal or informal arrangements to share outputs and cost of production.
- Using contract marketing and futures trading mechanisms (such as forward contracting to sell all of a crop at an agreed price, futures contracts, and hedging) to reduce price risks for commodities not yet produced, or for future inputs.
Source: Authors |
  
|
RSS