## Farm Management Tour: July 17, 2024

Learn about innovative farm management strategies, new technologies for improving efficiency and productivity, ways to ensure a successful transition of farm operations to the next generation. Join us at the 91st annual Purdue Farm Management Tour and reception honoring the 2024 Indiana Master Farmers in Randolph County (Winchester), Indiana on Wednesday, July 17th.

January 13, 2015

# What is Risk and Uncertainty

In this series of articles, we want to make a clear distinction between risk and uncertainty. This distinction is important for at least two reasons. First, the distinction between the two terms makes it clear that the information available to a decision maker differs depending on the decision that is being made. Second, the tools and strategies used to cope with each differs markedly. The tools available to deal with risk are much more plentiful than the tools available to deal with uncertainty.

Risk represents a situation in which probability information is available. Probabilities can be objective or subjective. Under the objective probability approach, a probability is defined as a relative frequency ratio based on a large number of cases. In this case, probabilities would not differ among decision makers. Often dice or games of chance are used to illustrate probabilities. These probabilities can be thought of as objective probabilities. Under the subjective probability approach, a probability is defined as the degree of belief an individual has that a particular event will occur. If probabilities are subjective they are also personal; two people can reasonably assign different probabilities to the same uncertain event. For example, the authors of this article likely have a different subjective probability associated with chance of corn averaging between \$4.00 and \$4.25 next year. The difference in subjective probabilities among individuals helps explain difference in behavior. However, it creates difficulties when seeking to model risk decisions for groups of people.

As noted above, a plethora of tools can be used to model risk. These tools include, but are not limited to the following: decision trees, simulation, exposure assessment, control charts, payoff matrices, portfolio theory, risk audits, risk scorecarding, and value at risk. All of these tools will be discussed in future articles. Uncertainty represents a situation in which probability information is not available. This is often the case when making decisions for which we do not have experience or for events that have not happened in the past. A prevalent example is business planning. Typically, when analyzing business plans we examine the best case, the most likely case, and the worst case scenarios. We do not have probability information available to us that tells us how likely each of these scenarios will be in the next five to ten years. Thus, we are dealing with uncertainty rather than risk.

Some authors refer to radical uncertainty or sheer ignorance. In this situation, possible outcomes of a given event are unknown and unlistable. Sheer ignorance describes knowledge of which an individual does not know he or she is ignorant, knowledge that he or she cannot imagine to exist. If sheer ignorance is applicable, knowledge is an unbounded set and can never be complete. Most economists would agree that there are many situations in which it is difficult to list all possible outcomes. However, they would also agree that it is possible to list at least a few of the likely options. If this is the case, we are in the world of uncertainty in which we can use scenarios and scenario analysis.

This article discussed the distinctions between risk and uncertainty. This distinction is very important when deciding the appropriate tools and strategies to use to cope with risk and uncertainty. The next article ​will briefly discuss risk measures (i.e., variability, downside risk, and loss exposure).

## Managing Strategic Risks on Your Farm

May 24, 2024

Purdue University’s Center for Commercial Agriculture recorded a series of short podcasts and accompanying videos to help agricultural producers improve their strategic risk management skills. Farms are exposed to strategic risks that are caused by a wide variety of unanticipated shocks to the operating environment ranging from government policy shifts to disease outbreaks.

## Key Resources

May 24, 2024

Advancements in production agriculture continue to accelerate making the business environment more complex and creating a significant need for a forward-thinking mindset. Develop an integrated risk management approach and build a strategic plan now.

## Farm Resilience, Management Practices, and Producer Sentiment: Segmenting U.S. Farms Using Machine Learning Algorithms

April 4, 2024

Margaret Lippsmeyer, Michael Langemeier, James Mintert, and Nathan Thompson segment U.S. farms by farm resilience, management practices, and producer sentiment. This paper was presented at the Southern Agricultural Economics Meeting in Atlanta, Georgia in February.

## Purdue Farm Management Tour & Indiana Master Farmer Reception 2024

Two outstanding farms in east-central Indiana will host visitors wanting to learn about farm and crop management on July 17th for the Purdue University Farm Management Tour. The Indiana Master Farmer reception and panel discussion will follow.

## 2024 Crop Cost and Return Guide

November 22, 2023

The Purdue Crop Cost and Return Guide offers farmers a resource to project financials for the coming cropping year. These are the March 2024 crop budget estimations for 2024.

## (Part 2) Indiana Farmland Cash Rental Rates 2023 Update

August 7, 2023

Purdue ag economists Todd Kuethe, James Mintert and Michael Langemeier discuss cash rental rates for Indiana farmland in this, the second of two AgCast episodes discussing the 2023 Purdue Farmland Values and Cash Rents Survey results.