What type of risk is associated with fluctuating prices of agricultural commodities?

Market risk pertains to the volatility and fluctuations in the prices of agricultural commodities, which can significantly impact farm income and profitability. This type of risk arises from changes in supply and demand conditions, economic factors, government policies, and global market trends, all of which can lead to unexpected price shifts.

When agricultural producers plan their budgets or make planting decisions, they must consider the market conditions that affect prices, understanding that they may receive less revenue than anticipated if prices drop. Conversely, market risk can also present opportunities for higher income when prices rise unexpectedly. Effective risk management strategies, such as futures contracts or diversification, can help farmers navigate these price uncertainties.

In contrast, production risk involves uncertainties related to the yield of crops or livestock, financial risk deals with issues related to debt and financing, and legal risk is associated with compliance or litigation risks that can arise in the operations. These aspects are essential to farm management but do not specifically address the consequences of price volatility inherent in market dynamics.