Understanding Risks

Risk in Agriculture

A risk affecting agriculture is the possibility of occurrence of an event that has adverse effects on both individual farmers and the overall performance of the agricultural sector in a region or area. Reduction of the negative consequences of risks is often possible and always desirable. Farmers’ development plans should consider how to handle agricultural risks. The risk is characterized by the following elements:

  1. Probability: The likelihood that a natural or man-made event or hazard will manifest itself in a given geographical location and within a particular time period. Examples of likelihood of a risk: a low-probability (very rare) event, like an earthquake; a high-probability (frequent) event, like minor pests.
  2. Elements at risk: what is affected by the hazard. Examples of elements at risks are: harvests; human and animal health; farm income.
  3. Type of losses: expected losses from a hazard, such as: physical damages; economic losses; livestock losses; human deaths.
  4. Severity: the size of losses associated with occurrence of the event or hazard. Severity can have differing degrees, even for the same risk. Examples of severity: low-severity, like in a drought causing small losses to farmers using drought-resistant seeds; and high-severity, like in a drought causing large losses to farmers cultivating non-drought-resistant seed varieties.
  5. Cause–effect mechanism linking all the elements above.

Sources of risks in agriculture

The sources of risks in agriculture are multiple and diverse, ranging from production, market, financial and institutional-related at the macro-, meso- and micro-level. Risk events may also be characterized by their magnitude, scope or spread, frequency and duration, and/or their history—all of which can affect a farm’s or firm’s vulnerability.

Another critical dimension of agricultural risks is the systemic nature of impacts. Micro-risk events known as idiosyncratic risky events affect individual farms or firms. Examples include plant and animal pests and diseases or the illness of the owner or labourers. Covariate risky events affect many farms and firms simultaneously. Typical examples include major droughts, floods, or fluctuating market prices that may have a wide impact at the community level (meso-level) or across an entire region or country (macro-level). Covariate shocks, arising from war, natural disasters, price instability, or financial crises, are difficult to manage locally and require a coordinated external response. Thus, an individual farmer or firm may face very different risks at the same time, with different levels of exposure and capacities to respond and adapt to them. The table below identifies some of the different types of risk that may be encountered:

Weather-related- Rainfall variability (a shortfall or excess) - Temperature variability- hailstorms - strong winds - floods - droughts - hurricanes - typhoons - wildfire
Natural disasters- Extreme events- earthquakes - volcanic activity - wildfire - landslides
Biological and environmental- Outbreaks - Poor water sanitation - Poor safety and quality control for food- crop pests - livestock diseases - contamination
Market-related- Change in supply/demand for inputs/outputs - Price variability of inputs/outputs International market instability - Variability in production - Time delays - Changes in production standards and trade tariffs- Price volatility - Market supply and demand volatility
Management and operational - Lack or inadequacy of information and knowledge- Poor management of farming practices and decisions - Inability to adapt to changes - Equipment breakdowns
Financial- Uncertainty on financial markets - International market instability - Lender’s willingness to provide funds- Rising interest rates - Difficulty in debt repayment - Non-availability of credit
Policy and political- National and local institutional instability - Policy changes affecting the value chain- Political upheavals - Riots - Regulatory changes - Malfunction in market access
Infrastructure-related- Absence or malfunctioning of infrastructures- Difficulties in access to provision of services for transport, energy, communication networks, etc. - Physical disruption of infrastructure - Regulatory changes
Labour- and health-related- Changes in the household and farming workforce context and ability to work- Illness - Injury - Divorce - Death