What Is Agricultural Risk Mitigation?

What Is Agricultural Risk Mitigation?

Agricultural risk mitigation is a series of techniques used to eliminate risk factors because a disaster can occur. An Agricultural consultancy or risk mitigation specialist can help to keep their clients advised of all the potential risks, how to avoid them and ways to protect yourself in the event of an unfortunate event.

After all, there is absolutely no way to escape a natural risk when it comes to the agricultural business.

Famine, weather conditions such as a flood, freezing due to extreme winter weather and even drought during the summer months can all lead to disasters. The cost of insurance can actually decrease if the company sees that you’ve taken all the necessary precautions to protect your crops. It could be something as simple as adding air blowers to fight against frost, using protective coatings against storms or frost and a sprinkling network that can be activated to combat an unexpected drought.

A specialist will help you figure out how to implement two types of strategies; one that deal with on-farm risk minimization techniques while the other deals with off-farm risk sharing techniques, including agricultural insurance. These strategies are set in place so that the farmer can plan on how to deal with issues such as short production cycles, diversification of their crop and livestock productions, which basically helps a farm to compensate with one product should another one fail, vertical integration, stabilization accounts, which act as a financial buffer during hard times, risk sharing strategies, marketing and production contracts, and derivative contracts, which help farmers cope with price risks and buy or sell primary assets like wheat at a certain price at a specific time.

The most important strategy however is insurance. The insurance company will be able to calculate the probability of a loss in order to come up with a premium rate for you. One thing that can’t be stressed enough is the presentation of reliable data. Like taxes, if something is off, the farmer is the one that will ultimately suffer.

Another risk mitigation technique involves mutual funds. This allows other bodies like distributors to share in the potential financial rewards of the business as well as the risk in case it bombs. This way, the individual farm owner doesn’t have to take the full brunt of the loss should an unforeseen disaster strike. 

Moral hazard is also a part of the insurance clause and it refers to a change in the individual who acquired the insurance policy’s behaviour. By this we mean if they are more reckless or less likely to protect their agricultural investments by for example refusing to invest in an air blower or protective coating, the insurance company will try to minimize the moral hazard issues from arising. This can be done by adding a deductible or a co-payment when the policy is made so that the insured bears at least partial responsibility for the loss. The moral hazard clause also forces the company to verify whether the insured is taking the necessary measures to prevent financial losses.

Ultimately the agricultural risk mitigation is there to help the farmer minimize the risk of major losses which could result in them losing the farm and losing a significant amount of money.

ARC - the right choice.