**1. Introduction**

448 Risk Management – Current Issues and Challenges

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Risk in agriculture is pervasive and complex, especially in agricultural production.(1, 2) Farmers confront a variety of yields, unstable output and input prices and radical changes in production technology as inherent in their farming operations. These affect the fluctuation in farm profitability from season to season and from one year to another.(3, 4) The sources of risk and level of its severity can vary according to the farming systems, geographic location, weather conditions, supporting government policies and farm types. Risk is a major concern in developing countries where farmers have imperfect information to forecast things such as farm input prices, product prices, and weather conditions, that might impact the farms in the future.(2, 5, 6) The types and severity of risks that farmers face differ from place to place. Incorporating and understanding the effects of risk at the farm level will benefit policy makers who develop appropriate strategies that can help farmers survive the numerous risks they confront.

Sources of risk in agriculture are classified into *business risk* and *financial risk.*(1, 7) Business risks can be classified further into a) production or yield risk, b) marketing or price risk, c) institution, policy, and legal risk, d) human or personal risk, and e) technological risk. On the other hand, financial risk occurs when farmers borrow to finance farm activities as farmers often face variations in interest rates on borrowed funds, inadequacy of cash flow for debt payments and changes in credit terms and conditions.(8, 9)

For several decades, agricultural production in Thailand has faced many risks such as variability in yields, product-prices and cost of inputs.(10-12) Thai farmers typically grow their crops in rain-fed conditions due to poor irrigation systems.(13) The annual rainfall fluctuates widely each year, and pests, diseases and poor soil fertility affect the yields of cash crops in

Thailand. In addition, agricultural commodity prices rise and fall annually depending on the demand and supply in both local and international markets, which are out of the farmer's control. Similarly, the costs of farm inputs also vary each year and may negatively affect farm production costs.

Sources of Risk and Risk Management Strategies: The Case of Smallholder Farmers in a Developing Economy 451

defined risk as the probability of a negative outcome. The respondents ranked rainfall variability, pests and diseases, and crop price variability as the primary sources of risk for crop production. Livestock price and weather variability and livestock diseases were

Patrick, Wilson, Barry, Boggess and Young studied farmer attitudes towards risk and risk management among mixed crop and livestock farmers in the US.(22) A total of 149 farmers in 12 states were interviewed. The respondents were grouped into five types of farm; mixed farming; cotton; corn, soybean and hogs; small grain and ranch. The results showed that changes in weather, output price and input costs were rated as the three most important

A nationwide mail survey was used to examine the sources of risk and the risk management strategies of New Zealand farmers by Martin(23). The survey covered eight types of farm including sheep and beef, dairy, deer, pip fruit, kiwifruit, cropping, vegetables and flowers. The results showed that marketing risk (such as change in product prices and change in input costs) was ranked as a very important source of risk by all farmers. Conversely, production risks (such as rainfall variability, weather, and pests and diseases) were

Pellegrino studied rice farmers' perceptions of the sources of risk and risk management responses in Argentina.(9) Using size of the respondents' farms as large, medium, and small farms, the author argued that a farmer's awareness of the sources of risk varied depending on farm size. The small size farm group tended to have a higher awareness of production

Meuwissen, Huirne, and Hardaker identified price and production risks as the most important sources of risk for livestock farmers in the Netherlands.(24) An insurance scheme was rated as the appropriate strategy to manage risk. Flaten et al. compared risk perception and the risk responses of conventional and organic dairy farmers in Norway.(19) The results revealed that the institutional (such as government support policies) and marketing risks were classified as the principal sources of risk for the organic dairy farmers. The authors ranked production cost variability and animal welfare policy as the greatest worries for

Hall, Knight, Coble, Baquet and Patrick found severe drought and meat price variability as the primary sources of risk perceived amongst cattle farmers in Texas and Nebraska.(25) In a recent study, large-scale South African sugarcane farmers perceived land reform regulations, labour

In terms of risk management strategies, Boggess et al. and Patrick et al. reported that 'placing of investments', 'obtaining market information' and 'enterprise diversification' were the most important strategies that the sampled crop and livestock farmers use to handle risk in the US.(21, 22) Meuwissen et al. found that 'cost of production' and 'insurance schemes' were regarded as important risk strategies among livestock farmers in the Netherlands.(24) Similarly, Flaten et al. noted that organic and conventional dairy farmers in

legislation and crop price variability as the three most important risk factors.(20)

regarded differently depending on geographical location, farm type and product.

perceived as important sources of risk for livestock production.

sources of risk in both crop and livestock production.

risks than the other two groups.

conventional dairy farmers.

Agriculture contributes approximately 7.86 per cent to Thailand's GDP and 8.98 per cent to exports in 2008.(14, 15) However, large numbers of farmers in rural Thailand still live below the poverty line. In 2007, Thai farm households earned an average income of 129,236 baht/year (US\$ 3,692) but only 39 per cent or 50,370 baht/year (US\$ 1,439) is from farm activities.(16) Thai farmers are basically smallholders and the national farm size is approximately 7.72 acres.(17) Most farmers have limited diversification potential, face resource problems, environmental variability, lack of soil fertility and water shortages especially smallholder farmers in the north-east region.(18) In addition, smallholder farmers in Thailand also face various sources of risk that vary both seasonally and annually.

Knowledge of the characteristics of risks that influence smallholder farmers is the key to developing appropriate strategies to deal with risks. However, empirical studies on farmers' responses to risks and how risk affects farmers' income, especially in rural Thailand are limited. The aim of this chapter is to examine the sources of risk for smallholder farmers in the central and northeast regions of Thailand and their risk management strategies. We will also relate the farmers' socioeconomic characteristics to their perceived sources of risk and their favoured risk management strategies to gain a deeper understanding of their choices.
