A variety of instruments and methods are used by farmers to manage risk. The use of production inputs to limit yield risk was discussed in a previous section. Insurance is a traditional instrument used to mitigate risk by pooling a large number of independent risks, collecting premiums from each, and paying benefits to those suffering losses. Crop insurance is available in many countries and is often underwritten or re-insured and subsidized by governments. In the United States, the national crop insurance program requires a history of at least three years of production yield in a given location before offering insurance. Pilot programs for new crops may provide coverage until a larger program is established. Crop insurers may also offer crop income insurance where a degree of price risk mitigation is included with yield risk mitigation in the insurance contract. Collaboration with crop insurers on establishment of a new crop insurance program can provide an important risk mitigation alternative for farmers.

Futures markets and options provide an important price risk management instrument for buyers and sellers of large volume commodities. Futures and options contracts are standardized contracts traded on central exchanges. The futures contracts specify date, location, quantity, and quality of a commodity to be delivered. By taking an offsetting position (called a hedge) in the futures markets, buyers and sellers can essentially lock in the price they will receive or pay for the commodity. Costs of using this instrument include transaction fees paid to brokers and the maintenance of a margin account with the brokerage. The margin account is a cash reserve that buyers and sellers must maintain with the exchange to ensure that they will honor their obligations under the contract. A large amount of capital may be required to maintain margin accounts. Most futures contracts no longer allow actual delivery and are cash settled instead, based on a specified spot market price. In either case, the price that a buyer or seller receives locally may differ with date, location, and quality from the price used to settle the futures contract. The difference between cash price and futures price is called basis. Basis is variable over time, so it is a remaining source of risk for futures contract hedgers, albeit considerably smaller than overall price risk. Options contracts are derivatives of futures contracts that are also traded on central exchanges. Commodity producers and consumers can buy options to establish a minimum or maximum price that they will receive or pay. They pay a premium to purchase the option contract. As option buyers they do not have to maintain a margin account. If prices move adversely, they can sell the option and recover the difference between the floor or ceiling price established with the option and the current price of the underlying futures contract. These contracts are unlikely to be available for new small volume commodities but are available for large scale crops, including wood products, and can be established for new crops when the volume becomes large enough.

Production contracts and marketing contracts are used widely in agriculture, particularly for specialty crops. Marketing contracts are also used where buyers and sellers seek to avoid marketing and procurement costs by establishing longer-term contracts for delivery and pricing. Marketing contracts may establish the schedule for delivery, the terms for pricing, and penalties, bonuses, and courses of action for various circumstances that may arise. Production and marketing contracts are also used for commodity agricultural products where buyers desire specific qualitative traits in their purchases and those traits are more costly to measure than to acquire through contract. Production contracts may include terms where the buyer provides some inputs such as genetic stock, provides harvesting or transport of the crop, and acquires all product from the crop. The production contract may provide a specified price with quality adjustments to be paid by the buyer to the seller upon collection of the product.

Marketing contracts and production contracts help mitigate many of the ongoing risks in agricultural production. Such contracts still leave the farmer or the buyer subject to risk of contract failure. Financial failure or other inability or unwillingness of the other party to meet their obligations under the contract may leave the remaining party in severe financial difficulty; particularly if there are no other processors or suppliers of feedstock nearby. Parties to contracts should have plans for contract failure in place before the contract is signed.

Strategies for managing financial risk include the use of fixed rate debt, diversification of crop mix and other agricultural enterprises, maintaining a large cash reserve or diversi­fication of investments in unrelated assets. Taking on partners or shareholders to provide more equity capital is another common strategy to manage financial risk. Using contracts and insurance to limit the probability and severity of financial losses helps limit risk of financial failure.