Uncertainty In Agriculture

In agriculture, decisions are frequently based on incomplete knowledge of the exact outcome of a particular decision. In virtually all instances, uncertainty is associated with risk. When decisions have to be made, farmers usually find their knowledge of external or exogenous factors to be incomplete. Decisions based on incomplete information of this nature will most probably result in mistakes. For example, an entrepreneur could believe that economic conditions in Japan will have virtually no influence on South Africa's economy. A decision based on this assumption will have a specific result, which could be either positive or negative. Either scenario carries a cost: the so-called opportunity cost, in a case the cost associated with using

A new technology could erase or lessen an advantage that a farmer had enjoyed. The tunnel production of frost-sensitive vegetables, for example, reduced the market advantage of Mpumalanga’s Lowveld. The uncertainty about whether an expensive technology will have the desired results or not could delay the acceptance of that technology, which could, in turn, hold certain advantages or disadvantages for the farmer. The rapid tempo of technological innovation also creates uncertainty. It could happen that just when a farmer finally accepts a new technology, a new, improved version is launched.

iii) Uncertainty about personnel - the unexpected illness of one or two key staff members at a critical time is very disruptive. Thoughtless behaviour by either the farmer or his workers could lead to unnecessary union action. The results of this could be loss of production and possible Arbitration or Labour Court costs. The farmer should make an allowance for these types of risk by setting aside funds or creating a credit reserve. This, however, could render that could have been used or more productive purposes unproductive or “sterile”.

3.1.4. Market

It should be noted that production, marketing and financial risks are closely interrelated. Any of the abovementioned business risks could have an impact on the financial results of a farm business. The longer the duration of a risk situation, the greater its effect on the financial stability of the farm business. The extended drought experienced in the summer planting regions in the 1980s, for example, drastically increased the sensitivity of commercial agriculture to interest rate changes and other financial shocks. The reason was that farmers increasingly had to employ their own capital (net worth) in addition to borrowed funds. During this time, borrowed funds increased dramatically in the balance sheets of farm businesses. As a result, the agricultural sector's general ability to absorb negative financial shocks diminished greatly. The open international economy in which agricultural producers nowadays have to make decisions has brought new and powerful variables into play, especially in comparison with the late