Risk Transference

Transference of risk is a very common way of managing risk; in fact, both individuals and businesses employ this mechanism all the time.

For example, if you drive a car or truck, you probably pay an insurance company (e.g., Allstate, Farmers, Geico, Progressive, etc.) to assume the risk of damages that might result if you are involved in a car accident.

Car Accident – Are you in good hands?

So, if you cause an accident resulting in $100,000 in losses, you will pay only a small portion (maybe $500) of the $100,000; the insurance company covers the rest. In short, you paid the insurance company to assume your risk.

For another example, consider the purchase of a new electronic gadget.

Damaged phone
Damaged Phone – Did you have an extended warranty?

When you pay for the device, you will probably be asked to purchase an extended warranty in case the device fails or is damaged. If you purchase the warranty, you are choosing to transfer away your risk; therefore, if your device breaks, you will receive a payment to cover the loss.

In agriculture, we face a wide range and depth of risks. So, many producers choose to strategically transfer away some of their risks, especially the risks that they have the least ability to manage.

Colorado - Potato Beetle damage
Colorado – Potato Beetle larvae eat the foliage of a potato plant.

Some common mechanisms for transferring agricultural risk are as follows:

  • Contracted production and/or contracted pricing;
  • Equipment warranties;
  • Financial instruments, such as futures and options;
  • General insurance products (property, health, life, etc.); and,
  • Crop insurance, administered by USDA/RMA.
Kansas – Drought damaged corn