Risk-bearing capacity is also related to cash flow. Cash flow needs are obligations for cash costs, taxes, loan repayment, and family living expenses that must be met each year. The higher these obligations as a percent of cash flow, the less able the business is to assume risk. Production risk is the potential loss in crop yield from a wide variety of sources including freezes, hurricanes, tornadoes, hail, flood, drought, insects, diseases, genetics, and quality of inputs. Fire and theft are also sources of production risk.
Market risk deals with both purchased inputs and sale of farm products.
It involves price fluctuations due to weather, foreign competition, government action, changing consumer preferences, production cycles, and over or under production of farm commodities. Inflation in the general economy can drive up the cost of inputs without a corresponding increase in value of agricultural products. Financial risk includes the cost and availability of debt capital, the ability to meet cash flow needs in a timely manner, and the ability to maintain and grow equity. Financial risk can involve casualty losses, falling land prices, technological advances that make current investments obsolete, and the potential loss of the farm to pay estate taxes. The ultimate financial risk is the risk of bankruptcy.