How to Better Understand and Manage Farm Losses
Updated: Sep 14
Agriculture requires you to understand and manage farming losses effectively. It can be risky and it involves making various decisions that affect farming operations. However, most factors that inform your decisions are unpredictable and subject to changes. The uncertainty is a risk and can cause farming losses.
Therefore, farmers must understand farming losses and have better risk management strategies. The techniques involve anticipating potential problems and acting accordingly to reduce losses. You'll be able to maximize your farm profits and have stress-free production activities.
The following article will help you understand and manage farming losses like a pro for maximum profitability.
Better understanding sources of farming losses
Farming is a biological process that is affected by weather, pest, and diseases. Low rainfall or drought will cause low yields, and heavy rain will damage or wipe out your crops. Also, an outbreak of pests or conditions will affect the result of the crops negatively.
When farming, you don't know how much rain will fall, whether there will be storms, or whether there will be pests or diseases. But still, you'll decide to plant your crops. If the above factors strike, you will lose the resources you spend tilling the land, planting, and fertilizing.
Additionally, the production equipment is a source of losses. If your tractor breakdown, it will affect your ability to harvest and increase production costs.
Marketing farming losses
Market changes in terms of prices are beyond your control as a farmer. The fee depends on the following;
The supply of the product; high supply of a product can reduce the price if it exceeds the demand.
Demand for a product; demand is affected by consumer preference, level of income, economic strength, and price of competing products. High demand will affect the price positively.
Cost of production: it depends on the input cost and yield, making it highly variable. Combining input cost and yield variations makes the cost of producing a source of farming risk.
The price movements can follow seasonal or cyclical trends that you can predict. But primarily, unexpected changes in demand and supply will affect the market prices. A grower will lose when the price brings lower returns than their input.
Financial losses occur when your borrow money to finance farming. The losses arise due to uncertainties about future interest rates and the ability to continue providing and generating funds to repay the loan.
If you borrow at high-interest rates, you'll lose money in the long run and have challenges making the repayments. Also, low market prices and low yield will make debt repayment difficult or impossible, leading to the sale of the farm.
Institutional refers to the irregular changes in the provision of services by an institution that supports farming. The institutions can be formal or informal and include banks, cooperatives, marketing agencies, and government extension services. The risks are a result of decisions taken by the institutions.
Part of the institutional losses is government policy uncertainty, such as price, incentives, and subsidies. If the government policies don't favor farming, such as low pricing, you might make losses. Also, food quality regulations, waste disposal policies, and income support payment decisions can lead to losses.
Human and personal losses
Human losses result from the risks the farm faces due to illness or death of employees and your situation. Accidents, disease and death will disrupt farming and its performance. Further, calamities such as HIV/AIDS and Covid-19 will affect human resources and productivity.
Additionally, labor shortages will adversely affect farming and cause losses. Also, political and social unrest will cause losses due to production disruptions. You'll make huge losses when you commit resources to farm and then lack the workforce to farm.
After harvesting, you'll need to store the yields before taking them to the market. If the storage facilities are inadequate, you'll have to keep some products outside, which will risk the products' safety and quality. Also, the products will be damaged if the storage facility is not in good condition and with the right features.
Interrelation of risks
The sources of farming losses, i.e. production, marketing, financial, institutional, and human, are interrelated. For instance, your ability to pay debts depends on production levels and prices. And financing the production depends on the ability to borrow money. Therefore, a combination of the risks is a source of farming losses.
Managing farming losses
The degree of loss depends on the action taken and the ability to predict future farming activities. Therefore, decision-making is the principal activity in managing farm losses. Some fundamental decisions include the crop, seeding rate, and fertilizer levels.
Good loss management depends on accurate information from reliable data. It's one of the essential tools a farmer can use to make rational risk management decisions.
You'll need all the necessary information regarding input and output prices and technical data to make effective decisions. If your crop depends on rain, you rely on weather forecast data.
Information for decision-making
There are various sources of information, including;
As a farmer, you need to keep records of your farming activities. The forms are a good source of historical production data; you can rely on them for weather and market decisions.
The records contain information about the crop yield, production cost, assets used, and other relevant data. If you keep the records accurately, they will help you see variations in
production and prices over time. Also, you can use them to examine your past decision and the outcome of those decisions. That way, you can reflect on your findings and assess risk preference.
You can obtain off-farm information from sources other than the farm. The task is thinking about the kind of records you need and finding appropriate and reliable sources, which can include;
Extension services and agricultural statistics publications
You might have to pay for off-farm information. In such scenarios, you should treat the data like input and apply marginal cost and return principles. Also, you need to reflect on the quality of information you can get to ensure it's accurate and reliable for better decisions.
You might require additional information to help you select new technologies, understand contractual and legal issues, and sustain the farm environment. The information includes:
Farming programs and policies
The above areas will affect your decision and could be sources of farming losses.
Approaches to managing farming losses
Production losses stem from uncertainty regarding weather, diseases, pests, and the introduction of new technologies. You can apply several strategies to manage production loss, such as:
Risk-reducing inputs. Risk-reducing inputs are production inputs that increase the chances of better quantity and quality products. Fertilizers will reduce the risk of low yields, and pesticides will minimize the risk of crop damage. Also, irrigation will reduce the risk of low rainfall and droughts. However, using a single risk-reducing input like a draught-resistant seed will not prevent pests and insect damage, and you'll still make losses. You must evaluate all the factors and combine the inputs to mitigate all the causes of production losses.
Loss-reducing technologies. You can apply new technologies and techniques to address production risks. Such include, drought-resistant seed, disease-and-pest-resistant seed species, and irrigation practices
Selecting low-risk activities: Choosing a farm enterprise that has lower risks in an effective way to reduce production losses. You can avoid an enterprise with high income but carries high risk/losses and choose a less profitable but less risky one.
System flexibility. A flexible farming system is an ideal way to manage farming losses. It allows for making quick and short-term changes in production. You'll be able to respond to changing circumstances to avoid losses and take up opportunities.
Custom farming. Custom farming involves agreeing with a custom operator to carry out farm operations. It is beneficial as the operations costs may be constant, meaning you won't face the risk of high equipment costs. You could also receive income and access to better farming technologies to reduce losses.
Production diversity. Diversification spreads the risks, and it's a good loss management strategy because the changing circumstances will only affect some farm enterprises and operations. You diversify by:
Generating income from off-farm activities
Engaging in the same enterprise in different locations.
Managing multiple farm enterprises together at one time or in the same season
Engaging in the same farming enterprise over a successive period
How to market farm losses
You can apply the following strategies to manage marketing losses;
Spreading sales. Spreading sales involves storing the crop and selling it at different times of the year. You'll have time to watch market changes and sell more when the prices are favorable.
Direct sales. Selling directly to the final consumer is a great way to improve profitability and reduce losses. Ensure you'll be able to sell everything taken to the market to avoid worse scenarios. Also, make sure the direct sales will cover the extra cost of the strategy.
Forward pricing. Forward practice is a prior agreement between the farmer and the buyer on the price of the crop. You'll agree on the crop's quantity, quality, time, and expense. This practice will help reduce losses when the market price cannot cover your input and production costs.
Market price information. Market price information will help you manage your marketing losses. You can use the data to track your product prices and estimates to help you decide on the level of inputs and market choice.
The strategies to manage financial losses in farming include,
Credit. Credit increases your capital to expand farming activities. However, it obliges you to repay debts, creating a risk of loan default. You'll be operating in an environment of higher financial risk. The best practice is to avoid credit or minimize credit by taking short-term loans to have certainty of the interest rates.
Liquidity. Liquidity is the ability of a farmer to raise money. Savings with high liquidity is a good practice as you can easily convert them into cash. You can convert your assets to money by selling them, but you need to start selling readily convertible assets.
Insurance. You can take insurance coverage to protect your farm from adverse financial issues. You'll be paying premiums, but in the event of a loss, the insurance cover will compensate for it. However, it would be best if you were careful with the insurance cost and its impact on your income.
Contingencies. Contingencies involve overestimating production costs, and it's a great way to budget for financial losses. It helps you to cover cost increases, hidden charges, and other expenses. You can use the experience when setting the contingencies.
Human and personal losses
The following approach will help you manage farming losses that result from form human and personal issues;
Human resource management
Better human resource management practices include;
Selecting workers with suitable skills and experience.
Ensuring the safety of workers.
Providing adequate supervision.
Regular and effective communication.
Labor planning will protect your farm from unexpected changes in the availability and productivity of labor. You can use a seasonal calendar to ensure every worker understands what and when they are working.
You can employ the following strategies to prevent the losses;
Build a better storage facility. A better storage facility will help you safely store the produce as you wait for the prices to increase. Ensure the warehouse is convenient and has an excellent place to cater to all your farm products.
Enable cold storage for fresh produce. More losses occur in the fresh produce value chain, and heat is the prime cause of spoilage. Therefore, you must acquire and install cooling equipment to reduce the losses.
Strengthen transport. Transport infrastructure is one of the main constraints for farming. It prevents market access, which increases the risk of damage to the produce. Better transport means will reduce food losses and increase your sales.
Understanding and managing farming loss
Understanding and managing losses in farming itself is a risk. Farming losses and the strategies to address them lack certainty, and you'll be operating with unknown variables. The uncertainty is in price, weather, policies, labor, diseases, and pests.
However, the above approach will help you reduce or eliminate the risks that cause farming losses. You'll have better experience responding to agricultural risks and changes and making wiser decisions. Your farming activities will be profitable, rewarding, and less stressful.