The following points highlight the top twelve measures to be adopted to deal with uncertainty in a farm enterprise. The measures are: 1. Diversification 2. Flexibility 3. Liquidity 4. Capital Rationing 5. Contract Farming 6. Choice of Reliable Enterprise 7. Adoption of Innovative Techniques 8. Discounting for Risk 9. Maintaining Reserves 10. Guaranteed Agricultural Prices 11. Buffer Stock Scheme 12. Crop Insurance.
Measure # 1. Diversification:
Diversification means that the farmer carries on several farm enterprises simultaneously in order to avoid the dangers of having all his eggs in one basket. This implies that even in a situation where transformation ratio and price-ratio expectations clearly dictate specialization in a single product, the farmer, as a precaution against uncertainty, does not do so and instead, diversifies his production by producing several products.
By such diversification, the farmer hopes to reduce the variation in his aggregate income because, generally, yield and prices of all products do not vary in the same direction simultaneously. If the return from one product is low, the return from another product might be high enough to compensate for the loss.
Measure # 2. Flexibility:
As an alternative or supplement to diversification, the farmer may use the technique of flexibility for minimizing the impact of uncertainty on his earnings. Flexibility means that the farming system is so arranged that farmer can without much cost, move out from one enterprise into another if economic conditions make this shift desirable.
With flexible techniques, it should be possible for the farmer to switch over resources, say from beef enterprise to milk enterprise. Flexibility, as heady says, is the avoidance of rigid production methods’. And in case of a multi-product enterprise, it also means avoidance of a rigid production pattern.
Measure # 3. Liquidity:
Apart from compromises in the designs of farm buildings and equipment, flexibility may require that the farmer holds a greater proportion of his assets in liquid from that he would if he did not care for flexibility. With liquid resources the farmer can take advantage of passing favourable opportunity such as highly remunerative price rise by purchasing additional resources.
Another advantage of liquidity is the ability it provides to the farmer to face unforeseen contingencies such as continued crop failure and market slumps. The farmer who has liquid reserves can withstand such contingencies better than his neighbour with less liquid resources.
Measure # 4. Capital Rationing:
Apart from diversification and flexibility, another way in which the farmer reacts to uncertainty is through self-imposed capital rationing. Capital rationing is a general term which means a restricted flow of capital to an enterprise even when the return to it is quite high. This condition is characteristic of agriculture in a large number of countries.
It has often been observed that while the marginal return to labour in agriculture is below that in the rest of the economy, the marginal return to capital is higher so that a more efficient allocation of resources would be achieved if labour were to move out of agriculture and capital to move in until the marginal product of each factor become equal in each sector of the economy.
Measure # 5. Contract Farming:
This is another device which can be adopted by the farmer to overcome uncertainty. It involves contractual agreements in money terms between the farmer, manufacturing firms and input suppliers.
Such agreements guarantee the farmer a certain price for a given grade of a product at given time. By this agreement, the farmer not only can mitigate the inherent price and income uncertainties of the traditional marketing system but also establishes useful links with manufacturing firms and input suppliers.
Measure # 6. Choice of Reliable Enterprise:
Farmers know that yield from certain enterprises is more stable than from others. For example, yield variation of pigs and poultry, is generally thought to be less than that of sheep and beef cattle. Again cereal yield is generally less variable than the yield from root crops.
Measure # 7. Adoption of Innovative Techniques:
Again uncertainty is avoided by the farmer by continuing to stick to the traditional crops rather than the crops involving new innovations even if these may be more remunerative. Innovations in the activities involving biological element have more uncertainty around than and are consequently slow to be adopted. In fact, one will not be wrong if one says that keenness to avoid uncertainty is one reason for the slow rate of technological progress in agriculture as compared with that in industry.
Measure # 8. Discounting for Risk:
This implies that the farmer produces less than the optimum output level on average in order to reduce losses in unfavourable seasons. Smaller production will reduce the losses if the situation turns out to be unfavourable. However, this may not be considered to be a suitable method of meeting uncertainty. Arguments against this method are the same as those advanced against capital rationing.
Measure # 9. Maintaining Reserves:
This is another from of flexibility. Maintenance of extra multipurpose equipment and labour force larger than what is normally necessary, to meet some types of uncertainty e.g., floods, etc., may be helpful. Maintenance of food reserves may also be helpful at times.
Measure # 10. Guaranteed Agricultural Prices:
This measure involves enactment of legislation giving the farmer more or less precise guarantee of the price level or the minimum price he may expect some time ahead. In the U.S.A. for example, legislation provides a system of guaranteed price for a wide range of farm products such as maize, cotton, wheat, rice, tobacco, groundnuts, wool, honey, milk and butter fat.
These prices generally lie within certain fixed percentages of the, ‘parity prices’ i.e., the prices ensuring some sort of harmony with the prices of the industrial products; and their actual level varies with the estimated in the coming year.
Measure # 11. Buffer Stock Scheme:
Like the guaranteed price scheme, the Buffer stock scheme is also aimed (generally) at removing price uncertainty. In this method, the buffer stock authority (which is ordinarily government agency) purchase stocks of agricultural commodities in years of bumper crops and unloads them into the market in years of crop shortages with a view to raising price in times of glut and lowering them in times of scarcity.
Thus by neutralising year to year fluctuations in output, buffer stock operations can bring about greater regularity in the year to year availability of crops and at the same time promote rational economic decision on the part of farmers by reducing price uncertainty.
An essential condition for the smooth and efficient functioning of the buffer stock scheme is that the buffer stock authority most be able to maintain a balance between its purchases and sales over a period. This would largely depend on the levels of ceiling and floor prices at which the buffer stock authority starts releasing and purchasing stock respectively.
Measure # 12. Crop Insurance:
While buffer stock and guaranteed price scheme are both aimed at reducing price uncertainty, crop insurance deals with the other major form of uncertainty that is, yield uncertainty.
By means of crop insurance, the farmer can insure himself against certain chance occurrences such as loss due to poor weather, insect infestations and disease. The farmer insures a small known cost, the insurance premium, and there by transfer the risk of much larger losses to the crop insurance agency.
Crop Insurance can be several types:
It can be:
(a) Insurance for specific crops
(b) Insurance for all crops taken together.
(c) Voluntary crop insurance; or
(d) Compulsory crop insurance.
Further crop insurance can be based on the individual approach in which the assessment of the indemnity payable the insurance agency is done separately for each individual farmer and is based on the actual crop output of the concerned farmer each year as compared with his normal output.
It can also be based on the area approach in which the assessment of indemnity is not done separately for each insured farmer but it is done together for all the farmers in a given area on the basis of the actual average crop production over the whole area as compared with the normal crop output of the area.