To cope with natural hazards (production risk) following policy aspects/management strategies:

(1) Maintaining a reserve of cash, inventories, credit, etc. to solve unforeseen

consequences.

(2) Adoption of enterprises involving low risk:

– There are some enterprises where yield and price variability are much lower than

others.

– Thus the inclusion of enterprises with low variability in the farm plans provides a good way to safeguard against risk and uncertainty.

– For instance the yields and price of cereals are more or less consistent as compared to the horticultural crops.

– Depending upon the risk-bearing ability, a farmer should choose the enterprises in which risk is the minimum level seen under adverse farming conditions.

(3). Contract farming:

– Contract farming can be defined as an agreement between farmers and processing and marketing firms for the production and supply of agricultural products in predetermined prices.

Advantages of contract farming to farmers:

a) Help to introduce new agricultural technology and enables to learn new skills

of production.

b) Farmer’s price risk is reduced through contract in advance.

c) Can help in opening of new markets, which would otherwise be unavailable to small farmers.

(4) Share cropping:

– Those farmers who don’t have sufficient cultivated land and take land on rent from

other farmers for cultivation may have to bear financial losses under situation of

failure of crops.

– land owners would like to minimize their risk by renting out land on cash rent rather than on share cropping.

– In such a situation if demand of land is higher to supply, then land owners’ condition will dominate and if supply of land exceeds demand, tenants’ condition may prevail.

(5) Diversification in production:

– Diversification in production, marketing and processing helps to minimize the risk in agribusiness.

– The purpose of diversification is that if return form one enterprise is low, the return from other may be higher.

(6) Flexible farm organization:

– Flexible farm organization refers to a situation in which there is scope to adjust

production plan in response to introduction of new enterprise.

– Flexibility can be of following type, i.e.

a) Time flexibility: Orchard plantation is a relatively more rigid enterprise than

annual crops like paddy, wheat, maize, etc.

b) Cost flexibility: Choosing the cost-effective measures i.e. whether to use the

labor or to use the machine.

c) Product flexibility: It aims at changes in production in response to price

signals. In this category, we consider the form of physical resources, which can

be switched readily from one product to another.

(6) Conglomeration:

– Situation of firm when it produces unrelated products. For example, TATA Company produces vehicles, mobiles, tea, etc.

Measures to be adopted through government support and other agencies:

1) Insurance of crops, livestock and farm assets:

–  Insurance has following benefits to the farmers:

a) It offers protection to farmers against the failure of crops and stabilize their farm income,

b) It improves credit worthiness of farmers in securing loan from financial agencies

c) It provides confidence to farmers in the adoption of modern agricultural technology,

d) It reduces the government responsibility to provide relief in case of crop failure,

e) It reduces the complete loss of farm assets.

2) Subsidies and support prices/price stabilization:

– Agricultural products face high price variations due to seasonal fluctuations.

– The risk of market price instability can be dealt with the policy of price stability.

3) Provision of institutional loan and marketing facilities (Credit provision):

–  Risk aversion among farmers may also result from lack of capital.

– So sound credit provision to the farmers may help to overcome resistance to the adoption of new technologies.

4) Development of irrigation facilities:

– The most obvious policy response to natural uncertainty is that of irrigation as an answer to rainfall variability to alleviate the risk of drought between one season and the next, and to smooth out within season fluctuations of water supply to plants.

5) Agricultural research and extension/Information (about market, market information, etc.) :

– Where risk-aversion is attributed to inadequate information (about prices, input use, new seeds etc.) then information provision is considered a useful component of risk policy.