Lecture 3 Module III-Production Risks

COURSE AE-A-10
TITLE: AGRICULTURAL RISK MANAGEMENT AND INSURANCE

MSc (Agribusiness Economics)
Batch 2022 – 2024
Final Semester (Jan ‘24– Apr ’24)
Course by
Dr Raosaheb Mohite
Visiting Faculty - Agri Value Chains
Gokhale Institute of Political Science and Economics (GIPE)

Deccan Gymkhana, Pune 411 001, MH State, India
Jan - Apr 2024 RM/RIA&I/AE-A-10/GIPE/M-IIl 1
Lecture
Module III
Production Risk in Agriculture
24 Jan 2024
9:00 – 11:00 Hr

3. Production Risk In Agriculture
Production Risks………..
Measures against risks Technological Changes
- Technological
- Research Improved Varieties..
- Decision Making
Right Fertiliser Use..
Moisture Stress……..
Pests and Diseases..
Riskiness of Net Returns
Aggregate Instability……
Output Stability…………..
Climate
change and
variability
Lack of Frequent
financial natural
services* disasters
Factors potentially
*Including limited aggravating risks in
span and agriculture
design of risk production
mitigation
instruments Uncertainties
Imperfect
in yields and
such as credit markets and
prices
and insurance
Weak rural
infrastructure

Price risks
Risks in
agriculture
Institutional that
Credit risks
risks contributes to
production
risks
Technological
risks
Common and
frequent
risks faced
by farmers

Common / frequent risks faced by farmers
Rainfall /water availability ‘Sowing time’
Temperature ‘Crop growth/duration’; ‘Milk production‘ & ‘Spawning in fish
Relative Humidity (RH) & Temperature ‘Pest and diseases’ in crops, livestock and poultry’
Radiation ‘photosynthetic productivity’
Wet and Dry spells standing crops, physiology, economic loss (fruit drop)
Extreme events (high rainfall /floods /heat losses of standing crops, livestock and fisheries
wave /cold wave/ cyclone /hail /frost

Climate Variability and Climate Change
Variability around the ‘mean’ Change in the ‘mean’ state

Effect of Use of Improved Varieties of Maize
vs
Different Levels Of N Fertilisers On Production
Methodology
• Five maize varieties: BH-540, BH-
543, BH-661, BH-600 & BH-140
• Two levels of nitrogen: 55 Kg N
ha −1 and 110 Kg N ha−1
• Control plot of BH-543 variety
maize without fertilizer
• Leaf area and Leaf area index of
maize varieties were a measure
Source: Abera et al (2017)
of growth (among others)
vs
Different Levels Of N Fertilisers on Production
Observations:
• Application of N fertilizer significantly affected Leaf area and leaf area
index
• resulted in significantly higher mean grain yield maize
• significantly affected all yield and yield components of maize.
• application at 50% and 100% of recommended levels of N fertilizers
led to 31% and 41%, grain yield increase, respectively, over the
control.

vs
Different Levels of N Fertilisers on Production
• The BH-540, BH-543, BH-661 and BH-600 maize varieties with
50% recommended N fertilizers gave higher grain yields
• suggesting economic feasibility & sustainable maize production
• Yields of Maize hybrids could be low when grown below
optimum management practices.
• In short, the use of improved varieties and optimum nitrogen
fertilizer application practices unlock the potential of high
yielding hybrid maize varieties.

Moisture Stress vs Yield
Yield reduction in a Maize crop is directly related to soil moisture weighted stress
Source: Weather Effects on Crops: Estimating Water Stress of a Crop, Iowa State University, Agronomy 541

Moisture Stress vs Evapotranspiration
• Evapotranspiration reduction in a corn
crop caused by limited soil moisture
under different demand conditions prior
to silking.
• Yield is reduced when ET demand
exceeds water supply from the soil
at any time during the corn life cycle
• Note: In the figure, ET is high at low
available soil moisture content.
Source: Weather Effects on Crops: Estimating Water Stress of a Crop, Iowa State University, Agronomy 541
Evapotranspiration and Crop Yield
• Evapotranspiration (ET) describes the movement of water
through evaporation (E) from the soil and plant surfaces and
transpiration (T) through the plant.
• Transpiration is the process of water movement through a
plant and its evaporation from aerial parts, such as leaves,
stems and flowers.
• Transpiration is an important concept because yield is related
to the amount of water a plant transpires.
The terms ‘Crop water use’, ‘Consumptive use’ and ‘Evapotranspiration (ET)’ are
interchangeably used to describe the water consumed by a crop.
Water needs to meet ET needs
Soybean water use will fluctuate throughout the season
depending on weather conditions and crop growth stages.
The mid- to late-reproductive growth stages are the most
sensitive to water stress, when the soybean does not receive
enough water to meet evapotranspiration (ET) demands
during the reproductive growth stages, and this can lead to
significant reductions in yield.
An understanding of soybean water use can help guide the
development of more efficient irrigation strategies.
- https://www.specialtyhybrids.com/en-us/agronomy-library/water-use-in-soybean-and-irrigation-
timing.html

Factors Affecting Evapo-transpiraton
• Crop water use (transpiration) during the growing season is a
major factor in attaining high yield potential.
• Soil water loss (evaporation) and crop water loss (transpiration)
occur simultaneously; making predictions of evapotranspiration
complex.
• Actual evapotranspiration values vary greatly from day to day
(0.04 to 0.40 inches/day) because of the following factors:
• Soil: residue cover, soil texture, soil moisture in the profile
• Crop: crop type, growth stage, cultivar
• Climate: radiation, temperature, relative humidity, wind speed

Soybean water use (ET) by growth stage.

No of Days after planting vs
Evapotranspiration and Transpiration
• Higher corn yields require more
water transpiration and therefore
more evapotranspiration.
• Typically, a 150 bu/ac corn uses 16
inches of water, 200 bu/ac corn uses
20 inches of water, and 250 bu/ac
corn uses 22 inches of water.
• For every inch of evapotranspiration
corn yield increases by approx. 17
bushels. Transpiration is one of the major sources of water into the
atmosphere providing 10% of the total water in the
atmosphere.

Salt tolerance of Crops (FAO, 2005)
ECe is the traditional a. Small vegetables
soil salinity Broccoli 2.8 9.2 MS

Brussels sprouts 1.8 9.7 MS
measurement with
units of deciSiemens Cabbage 1.0-1.8 9.8-14.0 MS
per metre (1 dS/m = 1 Carrots 1.0 14.0 S
mmho/cm); Cauliflower 1.8 6.2 MS

Celery 1.8-2.5 6.2-13.0 MS
ECe = the mean electrical
Lettuce 1.3-1.7 12.0 MS
conductivity of a
Onions 1.2 16.0 S
saturated paste taken
from the rootzone; Spinach 2.0-3.2 7.7-16.0 MS
Radishes 1.2-2.0 7.6-13.0 MS
Legend: S = Sensitive; MS = Moderately Sensitive

Crop tolerance @ Salinity

Crop losses related to
Pests and Diseases
• In the developing world, 40-50%
of all crop yields are lost to pests,
crop diseases, or post-harvest
losses;
• Even in the United States, that
number is 20-25%.
• Two major groups of insects
harbour the mostly economically
important post-harvest insect
pests:
• Beetles (Coleoptera) and
• Moths and Butterflies
(Lepidoptera)

Crop losses related to
Pests and Diseases
• Several Coleopteran and Lepidopteran
species attack crops both
• in the field and
• in store
• Crop damage by Lepidoptera is only
done by the larvae.

Strategy to Select
the Right Crop to grow
• According to Steven C Blank (1991), who came up with a new
index measure – Returns to Risk (RtR):
• Selecting which crops to produce is one of the most important
decisions faced by agricultural producers', yet many do not
understand the risks associated with that decision.
• Too often the analysis stops once a market opportunity has been
identified.
• Besides the profit they anticipate, producers need to consider the
relative risks associated with each crop to accurately assess market
opportunities.
Ref: Blank S. 1991. New index measures returns to risk in crop production. Calif Agr 45(3):36-39.

Strategy to Select
the Right Crop to grow
• The many agricultural crops produced and marketed
profitably by growers are by no means equal in posing
risks.
• For growers to select crops that best suit their needs, they
must take account of these differences.
• Unfortunately, strategies that lower risk usually reduce
expected net returns.
• Growers should consider the risk/ return trade-off when
making cropping decisions.
Income Risk Evaluation:
1. A net income series in real 1986 US$ was calculated for
three counties using annual data from 1958 to 1986*.
2. The Coefficient of Variations (CVs) and Return to Risk (RtR)
measures for the series gave somewhat different indications
of the level of risk.
3. For example, one-third of the crops listed for Fresno county
have negative RtR values (table on the next slide).
(Profit measures, rather than gross revenue used when evaluating Income Risk)
CV= Coefficient of Variation (CV is calculated by dividing the standard deviation (σ) of a data series (i.e., crop
yields for several years) by its mean and multiplying by 100, thereby expressing the figure as a %).
RtR= Risk to Return
Coefficient of Variation (CV)
vs Return to Risk (RtR)
No Crop Mean CV Leasing Rate RtR No Crop Mean CV Leasing Rate RtR
$/ac $/ac $/ac $/ac
1Alfalfa Hay 61.31 232.6 150 -0.622 11 Lettuce 860.44 94.6 150 0.872
2Alflfa Seed 46.81 408 150 -0.539 12 Olives 60.53 1147 508 -0.644
3Apricots 1041.11 109.1 593 0.394 13 Onions, dry 1934.83 58.3 710 1.087
4Beans, Dry 27.94 590.6 119 -0.552 14 Oranges 911.38 67.6 626 0.463
5Corn, field 50.78 191.1 95 -0.454 15 Peaches 1680.71 37.4 950 1.162
6Cotton 258.24 109.3 180 0.277 16 Plums 2500.21 39.7 1195 1.316
7Grapes, raisin 209.01 265.8 500 -0.523 17 Rice 187.35 102.4 172 0.078
8Grapes, table 1341.51 49.1 980 0.549 18 Silage, Corn 145.15 42.6 125 0.323
19 Strawberries 2910.55 176.8 2455 0.089
9Grapes, Wine 439.67 127.2 458 -0.032
20 Sugar beets 228.49 98.9 134 0.41621
10Lemons 1507.14 55.5 700 0.964 21 Tomatoes, fresh 5280.24 56.3 2035 1.092

Coefficient Of Variation (CV)
vs Return to Risk (RtR)
Crop Mean CV Leasing Rate RtR
$/acre $/acre
Alfalfa Hay 61.31 232.6 150 -0.622
Alflfa Seed 46.81 408 150 -0.539
Apricots 1041.11 109.1 593 0.394
NOTE Beans, Dry 27.94 590.6 119 -0.552
• All amounts are in real Corn, field 50.78 191.1 95 -0.454
1986 dollars. Cotton 258.24 109.3 180 0.277
• Crops listed are the Grapes, raisin 209.01 265.8 500 -0.523
only ones which had
positive mean returns Grapes, table 1341.51 49.1 980 0.549
for the data period. Grapes, Wine 439.67 127.2 458 -0.032
Lemons 1507.14 55.5 700 0.964
..Income Risk Evaluation:
• Although the select crops had positive net returns over the
data period, on average, the level of profits was not high
enough, relative to the risk - free return, to show a positive
return to risk.
• Thus, RtR as an index is a much clearer signal concerning the
performance of a crop as an investment than ambiguous CV.
• The RtR index has a built-in decision criterion and, therefore,
is a superior decision tool.

Diversification: tomato crop
Net Returns and Risk

grows next to wheat fields.
for Cover Crop Use In Tomato Production

• Tomato (Solanum lycopersicum L.) producers faced with
uncertain yields and prices, needed to follow a production
system that will reduce risk while maintaining yield, so that
tomato producers are economically sustainable.
• Study carried out following ‘Conservation Tillage’ production
system with ‘High Biomass Cover Crops’, was found to be an
economically viable alternative for tomato producers.
*A cover crop is a plant that is used primarily to slow erosion, improve soil health, enhance water availability,
smother weeds, help control pests and diseases, increase biodiversity and bring a host of other benefits to your
farm.
*https://www.cambridge.org/core/journals/renewable-agriculture-and-food-systems/article/net-returns-and-risk-for-
cover-crop-use-in-alabama-tomato-production/43045BFF4DD2A05F89717378AF900CED
Net Returns and Risk for
Cover Crop Use in Tomato Production
• A study was carried out with the objective of comparing the
economics of alternative production systems using different
cover crops, such as cereal rye (Secale cereale L.) and crimson
clover (Trifolium incarnatum L.), and different subsoiler
shanks* for fresh-market tomato production relative to a
commonly used plastic mulch system to determine the
preferred treatment.
The subsoiler shank cuts and loosens soil below the normal tillage depth of 100–200 mm;
helps eliminate standing water by letting the water drain away
*https://www.cambridge.org/core/journals/renewable-agriculture-and-food-systems/article/net-returns-and-risk-for-
cover-crop-use-in-alabama-tomato-production/43045BFF4DD2A05F89717378AF900CED

.. Net Returns and Risk for
• Study Outcomes:
• Using a ‘rye cover crop’: Gross revenues and net returns from tomato
production were higher than using plastic mulch in 2 of the 4 yrs.
• Using a ‘clover cover crop’: Gross revenues and net returns were
higher in 1 out of the 4 yrs.
• It was observed that the preferred treatment for a ‘risk neutral
producer’ was planting tomatoes into a rye cover crop w/ a wide shank
(studies between 2005–2008).
• For a ‘strongly risk averse producer’, all cover crop treatments were
preferred to plastic mulch.

.. Net Returns and Risk for
• Study Conclusion:
• Use of a cover crop in tomato
production has the potential to
be an equally profitable, less
risky alternative to plastic mulch
Buckwheat can produce
2 to 3 tons of dry plant
material per acre and
can be broadcast or
drilled. Photo credit:
Alex Stone, Oregon Multiple Benefits of Cover Crops
State University.

Soil Erosion Research
and Aggregate Instability

Soil Erosion Research
and Aggregate Instability
• Relationship between aggregate stability & interrill erodibility can be a
predictor of the soil susceptibility to erosion (Adornis et al, 2014).
• This relationship is often used instead of the expensive and time-
consuming in situ soil erosion studies and models.
• ‘Aggregate Instability’ is a widely used physical indicator of soil interrill
erodibility
• The soil erosion research provides important and definite solutions
that can halt its negative impacts on the environment.
RILL EROSION: Runoff from a soil surface may concentrate into small, erodible channels known as rills. In rill erosion, soil loss is due mainly to
detachment of soil particles by flowing water, whereas in INTERRILL EROSION, soil particle detachment is caused essentially by raindrop
impact, and the particles are transported by raindrop splash and runoff flow [Watson and Lafien, 1986]

Rill erosion occurs when runoff water forms small channels Interrill erosion is the detachment and transport of soil
as it concentrates down a slope. These rills can be up to 0.3m material from the surface of the soil matrix by raindrop
deep. If they become any deeper than 0.3m they are referred to impact and overland flow
as gully erosion.

Output Stability
• The amount and stability of agricultural production is
determined by crop yield and cultivated area.
• The interdependence of agricultural production and its
stability on ecosystem services is a concept of considerable
importance for planners.
Agricultural ecosystems provide humans with food, forage, bioenergy and pharmaceuticals and are
essential to human wellbeing. These systems rely on ecosystem services provided by natural ecosystems,
including pollination, biological pest control, maintenance of soil structure and fertility, nutrient cycling and
hydrological services. Preliminary assessments indicate that the value of these ecosystem services to
agriculture is enormous and often underappreciated.
Power Alison G., 2010. Ecosystem services and agriculture: tradeoffs and synergies.
Phil. Trans. R. Soc. B3652959–2971http://doi.org/10.1098/rstb.2010.0143

..Output Stability
• Yield increases asymptotically with the resources provided by
farmers’ inputs and environmentally sensitive ecosystem
services.
• Declining yield growth with increased inputs prompts
conversion of more land to cultivation, but at the risk of
eroding ecosystem services
Agroecosystems also produce a variety of ecosystem services, such as regulation of soil and water quality,
carbon sequestration, support for biodiversity and cultural services. Depending on management practices,
agriculture can also be the source of numerous disservices, including loss of wildlife habitat, nutrient runoff,
sedimentation of waterways, greenhouse gas emissions, and pesticide poisoning of humans and non-target
species. The tradeoffs that may occur between provisioning services and other ecosystem services and
disservices should be evaluated in terms of spatial scale, temporal and reversibility. -
Power. Alison G., 2010
End
rashbmohite@gmail.com

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COURSE AE-A-10

TITLE: AGRICULTURAL RISK MANAGEMENT AND INSURANCE

Gokhale Institute of Political Science and Economics (GIPE)

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Variability around the ‘mean’ Change in the ‘mean’ state

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Source: Abera et al (2017)

Source: Abera et al (2017)

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soil salinity Broccoli 2.8 9.2 MS

per metre (1 dS/m = 1 Carrots 1.0 14.0 S

mmho/cm); Cauliflower 1.8 6.2 MS

Legend: S = Sensitive; MS = Moderately Sensitive

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$/ac $/ac $/ac $/ac

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Net Returns and Risk

for Cover Crop Use In Tomato Production

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