Managing risk is about managing choices.

Start with a classic dilemma. Every growing season, the farmer confronts a number of decisions—what crops to plant, how much to grow, whether to expand production. Absent information about the price she will get at harvest, the farmer’s options are constricted and she risks catastrophic losses to her farm if the price is below her baseline costs.

On the other side, a firm that processes and distributes food needs to buy from a number of farmers, but is concerned that the price at harvest will be too high to run the business. The uncertainty stunts growth and innovation, resulting in inaction. Status quo prevails.

Over centuries, farmers and buyers have worked out agreements using contracts and insurance products to manage risk and fix an acceptable level of variance on price and volume. Risk management tools distribute risk among multiple parties and promote win-win outcomes. Status quo is overcome. Deals get done. Innovation is possible.

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