Whole Farm Risk Management

Risk is the source of above-average profits – and losses. Farmers face many different types of risk, and most farmers manage risk adequately enough to stay in business for quite a long time. ‘Risk’ is a term given various meanings, but they always relate to the volatility of potential outcomes. In business management the core of the management problem is dealing with uncertainty. In decision making, how do we cope with knowing that we don't know what is going to happen in the future? One consequence of uncertainty that makes some decision analyses problematical is that the decision maker's goals are modified in response to the existence of this uncertainty. Included in the decision process about alternative uses of resources associated with differing degrees of uncertainty and risk is the reality that the goals themselves are modified by the existence of uncertainty. The nature and extent of this modification is determined by the decision maker's perception of where the decision lies on the continuum from risk (probabilities can be estimated and risk analysed) to uncertainty (no probability estimates are possible, uncertainty isn't able to be analysed), and by their attitude to these circumstances.

Risk is conventionally classified into two types: business risk and financial risk. Business risk is the risk any business faces regardless of how it is financed. It comes from production and price risk, uncertainty and variability.