Agriculture is, without a doubt, one of the riskiest sectors of economic activity. At the same time, agriculture holds enormous potential for reducing poverty in rural areas. Agricultural risks have a profound impact on poverty in that they undermine possibilities for rural entrepreneurs (particularly farmers) to accumulate assets, invest in and develop businesses, and gain access to health and education services.
Farming methods, and the context in which agricultural production and marketing take place, have changed dramatically during the last few decades. Increasingly, farmers, firms, governments, and many other actors are learning that agricultural production and marketing are complex activities, marked by pervasive and increasing risks that result from a broad set of structural, demographic, market, and institutional changes some of which are associated with globalization and the creation of new technologies.
The recent apparent increase in the frequency of natural disasters such as earthquakes, hurricanes, droughts, and floods has implications for managing agricultural risk. Data suggest that climate change is leading to increased volatility in weather patterns and consequently to instability in commodity prices, which places severe financial stress on producers, consumers, exporters, importers, financiers, and governments. As budgets to respond to crises are under pressure, many organizations are thinking about ways to establish risk management strategies before a crisis occurs, rather than reacting after the event. Responding to a problem is generally more costly, less efficient, and difficult to manage in the aftermath of a crisis.
Effective approaches to managing agricultural risks are clearly needed. Vital to effective risk management is an understanding—by all actors in the agricultural supply chain— of the critical risks faced in agriculture and the solutions available to manage those risks. Risk management, as a practical discipline, is therefore in high demand. It is the process of assessing agricultural risks, in consultation with all interested parties, to weigh alternative options to mitigate, transfer, and/or cope with identified risks.
The manner in which each supply chain participant goes about managing the risks that it faces can help or hinder the risk management efforts of other participants. Risks and risk management in a given supply chain are intimately linked and therefore require a system-wide approach considering the distribution and management of risk. The process of risk management encompasses the following phases:
Risk assessment covering the identification and characterization of risks, including the possibility of occurrence and consequences, development of risk profiles, and their prioritization.
Identification and selection of risk management options—involving the identification and evaluation of possible options and then the selection of a strategy or combination of strategies to reduce the risks for income and welfare.
Risk communication and implementation of risk management decisions.
Monitoring and review—evaluating the balance between costs and benefits and assessing the operational difficulties, both in the presence and absence of the chosen strategy.
Risk management is not a linear process. In agricultural supply chains, risk management is an interactive process in which information and opinions are exchanged throughout. This exchange considers risk-related factors, and perceptions among assessors, managers (farmers, firms), researchers, and other interested parties, leading to simultaneous determination of risks, management strategies, and policies.