A number of empirical studies find that farmers are risk-averse, though only moderately in many cases. There is also evidence to show that farmers’ risk aversion results in cropping patterns and input use designed to reduce risk rather than to maximize income. Farmers adopt a number of strategies to manage and cope with agricultural risks. These include practices like crop and field diversification, non-farm employment, storage of stocks and strategic migration of family members. There are also institutions ranging from share tenancy to kinship, extended family and informal credit agencies. One major obstacle to risk sharing by farmers is that the same type of risks can affect a large number of farmers in the region. Empirical studies show that the traditional methods are not adequate. Hence there is a need for policy interventions, especially measures that cut across geographìcal regions.
Policies may aim at tackling agrìcultural risks directly or indirectly. Examples of risk-specifìc policies are crop insurance, price stabilization and the development of varieties resistant to pests and diseases. Policies which affect risk indirectly are irrigation, subsidized credit and access to information. No single rìsk-specific policy ìs sufficient to reduce risk and is without side-effects, whereas policies not specific to risk influence the general situation and affect risks only indirectly Crop insurance, as a policy measure to tackle agrìcultural risk directly, deserves careful consideration in the Indian context and in many other developing countries-because the majority of farmers depend on rain-fed agriculture and in many areas yield variability ìs the predominant cause of their income instabilìty.
The need for policy intervention to mitigate risks in agriculture is because