Producer perceptions of agricultural risk in 2017
Yield and price risk take center stage in most discussions surrounding risk in agriculture. While these are obviously important aspects of risk to any farm business, the risks faced by agricultural producers are much broader than prices received for products sold and the risks associated with physical production of outputs. Today, sources of risk in agriculture are commonly classified into five general areas (summarized from Crane et al., 2013):
- Production risk – Any activity or event that results in variability in farm output (for example, yield variability from weather, pests, diseases, and technology).
- Marketing risk – Any activity or event that results in variability in prices farmers receive for their products or pay for their inputs (for example, commodity price volatility).
- Financial risk – Any activity or event that threatens the financial health of the farm business (for example, cost and availability of credit, meeting cash flow needs, and absorbing short term financial shocks).
- Human risk – Any activity or event that relates to keeping all of the people involved in the business safe, satisfied, and productive (for example, health and well-being, family and business relationships, and employee management).
- Legal risk – Any activity or event with legal implications (for example, contractual agreements, business organization, regulations, and public policy).
The first step in risk management planning is identifying and classifying prospective risks (Crane et al., 2013). Therefore, when identifying ways to better serve your farm customers, it is important to understand how they view the various sources of risk they face. Previous work has been done to assess farmer perceptions of risk areas, but a current evaluation is lacking. Given that producer perceptions of risk are certain to change over time, it is our goal to provide you with insights into how farmers perceive the risks they currently face using the results of the 2017 Large Commercial Producer Project.
A choice experiment was conducted as part of the survey eliciting farmer perceptions of general risk areas. Using farmer responses we are able to identify and rank the areas of risk that farmers find most important when managing their farm businesses. The nature of the experiment conducted facilitates estimation of preference shares (by design summing to 100 percent total) which represent the relative ranking of importance among the five risk categories.
Similar to previous studies, production risk is still the most important source of risk for most farmers in our sample, with a mean estimated preference share of 36%. Producing physical output is the fundamental operation of any farm business, and the inherent risk associated with production agriculture continues to be farmers’ primary reported risk management concern.
Financial risk (26 percent share) and marketing risk (19 percent share) are the next most important sources of risk for producers in our sample. While these two risk areas are obviously closely related,farmers have previously ranked marketing risk (specifically commodity price risk) as one of the top two sources of risk they face. This adjustment in ranking is a clear indication of the impact of the current economic downturn on how farmers view risk, and provides evidence of the financial stress that many farm businesses are currently facing.
Lastly, human risk (12 percent share) and legal risk (7 percent share) were the lowest ranking risk areas for the farmers in our sample. While it is not surprising that these “non-traditional” risk areas rank lowest (relatively), it is important to note that these two sources of risk are still non-trivial for farmers. Although they are not as important relative to other sources of risk studied, the awareness of today’s farm managers to human and legal risks affecting their farms is measurable and likely growing.
The implications of these rankings are far reaching. By better understanding your farm customers, specifically their views of the risks they face, you can better tailor how you engage and the products and services you provide. For a discussion of these implications, join us for our session on “Farmer Perceptions of Risk” at the 2017 National Conference for Food and Agribusiness. In addition to identifying and discussing general risk areas that are most important to farmers overall, we also spend some time exploring the relationship between farmer rankings of risk areas and other demographic and enterprise characteristics.
The 2017 National Conference for Food and Agribusiness, Nov. 7-8 in West Lafayette, Ind., will bring together professionals from across the agri-food system to gain industry insights from the Large Commercial Producer Project. The project is built around a survey of agricultural producers in an effort to understand their preferences when interacting with agricultural salespeople, retailers, lenders and manufacturers. Learn more and register today!
Crane, L. G. Gantz, S. Isaacs, D. Jose, and R. Sharp. 2013. “Introduction to Risk Management.” Extension Risk Management Education Agency, USDA. Available online at http://extensionrme.org/pubs/IntroductionToRiskManagement.pdf.