RISK MANAGEMENT IN AGRICULTURE.

Principal Risks



This chapter discusses the evidence on the type and magnitude of


risks. The chapter is organised around production risks and price or


market risks. Because of the paucity of risk studies at the farm level,


we consider the sources of production risk in weather and in pests


and diseases. In price risks, we show how exogenous and endogenous


factors play a role in price variability.


Risk Management at Farmers’ Level


This chapter discusses farmer strategies to combat risk. This


chapter as well as the next rely heavily on the findings from ICRISAT


village studies. A distinction is usually made between risk reducing


strategies that the farmer adopts ex-ante to lower risk and risk coping


strategies that the farmer adopts ex-post. Risk reducing strategies


include crop diversification, intercropping, farm fragmentation and


diversification into non-farm sources of income. Risk reducing


strategies can be effective in production and market related risks but


they are typically costly for those farmers who have to forego their


most profitable alternatives. Risk coping strategies are relevant for


dealing with catastrophic income losses, once they occur. Under risk


coping strategies, farmer may rely on new credit, the sale of assets,


temporary off-farm employment. Other strategies might involve


contractual relations in land and labour. For instance, sharecropping


distributes production risks while contracting with traders and


Risk Management • BHARAT RAMASWAMI e t al . 35


merchants for credit and marketing is another way of coping with


market risks. Similarly, interlocked contracts are another mechanism


which re-distributes risk between the contracting parties.


Risk Management at Community Level


At the community level, exchanges and informal credit are the


principal traditional risk coping strategies. This section will discuss


their effectiveness and their limitations that arises because of the


covariate nature of agricultural risks.


Production Risks, Technological Change


and Crop Insurance


The green revolution and the subsequent developments that have


led to improved varieties has been a major factor in the


transformation of Indian agriculture. The first part of this chapter


considers the impact of technological change on production risks. The


second part of this chapter considers the government response to


production risks in the form of crop insurance programmes.


Market Risks, Government Interventions


and Futures Markets


The most important development in the agricultural economy to


have an impact on market risks was price support programmes. This


chapter considers market intervention operations and their impact on


producer risk. The chapter also considers a newer development in the


private sector, which is the system of contract farming. This system


takes its appeal among growers because of the price insurance that it


offers. Another private sector solution to price instability is futures


markets. The chapter winds up with a discussion about the value of


futures markets in India as a risk management tool.


Sources


This study on risk management is a part of the larger study


conceived by the Department of Agriculture and Cooperation,


Ministry of Agriculture, Government of India called “State of the


Indian Farmer – A Millennium Study”. The guidelines that have been


provided to the authors of the individual components of the


36 State of the Indian Farmer: A Millennium Study


millennium study seek to define their scope and content. According


to them, the millennium study “seeks to record the impact of the


transformation induced by public policy, investments and


technological change on the farmers’ access to resources and income


as well as the well-being of the farm households at the end of five


decades of planned economic development.” Thus it is expected that


the study “give a historical perspective of developments, changes in


policies and programmes and their impact on professional and


economic environment of the farmer………The papers are in the


nature of comprehensive reviews in which the authors are expected to


paint an objective and unbiased image of developments in agriculture


during the last five decades keeping in view the farmers’ perspective


or farmer at focus…. Policy prescriptions are to be avoided.”


In keeping with the objectives of this study, we focus entirely on


India although there are occasional references to other developing


countries. For recent surveys on agricultural risk management in the


developed countries, see OECD, 2000 and European Commission,


2001. Within the literature on agricultural risk management in India,


we exclude papers that are exclusively modelling contributions.


Clearly, progress in modelling is essential for better design of risk


management programmes and policies. However, unless the paper


throws light on either existing risks, risk management practices or


policy issues, the subject is not appropriate for this study. The study


also excludes from its ambit prescriptions for better policies.


We also note two limitations of this study. First, because of the


absence of relevant literature, this study is unable to provide a


systematic chronology of developments in agricultural risk


management. This lacuna is addressed to some extent by our


description and analysis of the impacts on the farmer’s risk


environment due to major changes in the agricultural economy (in


Chapters 5 and 6). Second, as documented in Chapter 2, paucity of


information at farm level has meant that the goal of viewing risk from


the perspective of farmer is difficult to achieve by a direct description


of the farmer’s risk environment. To circumvent this problem, this


study supplements the limited number of farm-level studies by


information assembled from diverse sources on farm-level risk factors.