Managing Risk in Financing Agriculture
Sound risk assessment and management is a fundamental element of sustainable agricultural finance at the level of the farm, the financial institution, and throughout the agricultural value chain. The risks involved in financing agriculture can be broadly classified into three categories. The first relates to agricultural production and includes natural factors, such as weather, pests, diseases, and market factors, such as the price of seeds, fertilizers, and pesticides. The second type of risk relates to the farmer and his or her well-being, assets, skills, and ability to bargain effectively with input suppliers and buyers of produce in local markets. The third type of risk relates to financial institutions and their capacity and the regulatory environments in which they operate. Risk management instruments are required in all three categories.