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 crop-ping 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-form employment, storage of stocks and strategic migration of family members. These 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 risk 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 methods that cut across geographical regions.
Policies may aim at tackling agricultural risks directly or indirectly. Examples of risk-specific 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 risk specific policy is 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 agricultural 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 is the predominant cause of their income instability.
The need for policy intervention to mitigate risks in agriculture is because:
The passage explicitly states that "Empirical studies show that the traditional methods are not adequate. Hence there is a need for policy interventions." This directly supports the conclusion that the strategies adopted by farmers and the existing risk-sharing institutions are insufficient to manage agricultural risks effectively, thereby necessitating policy intervention.