Managing risk is an important part of farming and its management is a concern for those governments which include this as one of their agricultural policy objectives. This report presents a framework for the analysis of risk management in agriculture that can be used for the analysis and efficient design of policies in this area. The principal concept is a holistic approach as opposed to a linear approach. A linear analysis dealing with only a specific source of risk, a specific farmer’s strategy, or a specific policy measure is likely to lead to inefficient policy choices. Risk management should be analysed as a system in which there is interaction between many elements. These elements have been organised around three axes: the sources of risk, farmers’ strategies and government policies. A number of issues and concepts are crucial to the understanding of these interactions and must be discussed from all three axes.

Agricultural production is subject to many uncertainties. Any farm production decision plan is typically associated with multiple potential outcomes with different probabilities. Weather, market developments and other events cannot be controlled by the farmer but have a direct incidence on the returns from farming. In this context, the farmer has to manage risk in farming as part of the general management of the farming business. Hazards and unforeseen events occur in all economic and business activities and are not specific to agriculture. However, farming risk and risk management instruments in the sector may have a certain number of specificities.

All agricultural policy measures have an impact on risk.1 Some measures, however, are specifically designed to reduce price, yield or income variability, or to smooth consumption, and thus help farmers manage risk, either because they prevent or reduce the occurrence of risk (risk reduction), or because they limit the effect of risk on income (risk mitigation) or consumption (risk coping). Risk reduction measures would be, for example, disease control measures such as vaccination, which aims to limit the occurrence and spread of animal diseases and thus prevent/reduce potential losses in livestock receipts. Market price support (MPS) measures, which stabilise domestic prices, also reduce domestic price risk. Risk mitigation and coping can operate through established (ex ante) mechanisms such as insurance schemes or income stabilisation programmes, or through ex post interventions such as ad hoc assistance to compensate income losses.

Agriculture is often noted as a textbook case of economic activity fraught with risk. Agricultural producers regularly demonstrate concern for the economic uncertainty of the industry and major risk management tools such as futures markets have their origins in the agriculture sector. Similarly many farm support programs are justified primarily as risk safety net for agricultural producers. While risk has clear academic definitions as discussed in the next section, lay perceptions of risk are often associated with potential negative outcomes but often not articulated in probabilistic terms. This is in spite of the fact farmer behaviour is often clearly reflective of perceived subjective risk and demonstrated risk aversion.