Agricultural Finance: From Crops to Land, Water and Infrastructure

Chapter 13Infrastructure and Farming Management in the Digital Age

‘I had always imagined paradise as a kind of library.’

Jose Louis Borges

13.1 Introduction

Risk is an important aspect of the farming business. The uncertainties of weather, yields, prices, government policies, global markets, and other factors can cause wide swings in farm income. Risk management involves choosing among alternatives that reduce the financial effects of such uncertainties.

Seven types of risk may be identified:

• Production risk derives from the uncertain natural growth processes of crops and livestock. Weather, disease, pests, and other elements affect both the quantity and quality of commodities produced.
• Price (or market) risk refers to uncertainty about the prices producers will receive for commodities or costs of the inputs such as seeds and fertilizers. The nature of price risk varies significantly from commodity to commodity.
• Changes in the macroeconomic environment.
• Financial risk occurs when the farm borrows money and needs to repay its debt. Rising interest rates, the prospect of loans being called by lenders, and restricted credit availability are some other facets of financial risk.
• Institutional risk refers to government actions: tax laws, regulations for pesticide use, rules for animal waste disposal or income support payments are examples of government decisions that may impact the farm business, together with political risks and trade restrictions.
• Operational risk refers to accidents, ...