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Monday, March 1, 2010

Production Risk

In my previous blog, I mentioned five primary sources of risk I mentioned previously, today I’m going to cover Production Risks. Agricultural production suggests an expected yield or outcome. When variations in those expected outcomes occur your ability to achieve the financial goals you set are at risk.

There are five major sources of production risk: weather, pests, diseases, the interaction of technology with other farm and management characteristics, genetics, machinery efficiency and the quality of inputs. With these in mind, read the strategies listed below and see if any can be implemented for your operation.

Crop insurance is a risk management tool that protects against losses and also offers the opportunity for more consistent gains. It provides two important benefits: ensures a reliable level of cash flow and allows more flexibility in your marketing plans. There are a wide variety of crop insurance programs and coverage levels available. Crop insurance is available on more than 60 crops but must be purchased through a private crop insurance agent. More information regarding crop insurance is available on the ArborOne website.

An effective way to counter income variability is through diversification. The combining of different production processes is diversification. It is effectively implemented when the low income from one enterprise is simultaneously offset by satisfactory or high income from other enterprises. Diversification can be different crop types, combination of crops and livestock, different endpoints in the same production process or different types of the same crop.

Contract production is when an agribusiness firm commits the producer, through a contract, to deliver a specific quality and quantity of final product. Common in poultry and livestock, it is not unheard of for specific row crops such as tobacco or peanuts.

Evaluating new technologies is a valuable practice for today’s farmer. Two of the newest are genetically altered seeds (herbicide, disease and insect resistant) and precision farming (technology that controls the rate of application of crop inputs such as seed, fertilizer and pesticides on each acre of land). Farmers who adopt these innovations are trying to reap the benefits of lower input costs and environmental quality, as well as higher crop yields due to improved pest control and cost effective use of crop inputs.

See anything that interests you? Something that may help? Don’t hesitate to contact the relationship managers at ArborOne Farm Credit. We are the agricultural finance experts. We have answers.
Next time… Marketing Risks

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