Shifting Risks of Market Conditions

Risks of changes in market conditions are not insurable because losses cannot be anticipated with accuracy; and, even if this could be done, the cost of such insurance would be prohibitive. Consequently, various methods indicated in the following discussion are used to shift all or parts of such risks to others.

Shifting Individual Risks to Society

A high degree of protection has been enjoyed by many companies when the government, under conditions of war or national emergency, has guaranteed minimum prices for certain products. Over a long period of war and nonwar years, prices of certain basic agricultural products have been controlled or supported at given levels as a matter of public policy. This does not eliminate price risks, but does involve the shifting of a large part of the risk of individuals to the government and, consequently, to the whole of society.

Cooperative Activity

Risks incident to fluctuations in prices have frequently been reduced through the activity of trade associations. Although price fixing through such associations is contrary to law, it is probable that there still remain informal understandings among members of some associations with regard to prices that should prevail at a given time. Another example of risk-shifting activity is afforded by cooperative marketing organizations. When a large group of agricultural producers pool their commodities, the place and time risks arising out of sale in unfavorable markets are greatly diversified and minimized for each participant.

Manufacture to Order

Market risks are reduced when goods are sold in advance of manufacturing. This is not the usual situation in industry but is common for some types of products, such as major industrial installations, special purpose industrial equipment, and certain classes of fashion apparel. Most men's suits, for example, are sold to retailers from a sample line shown many months prior to delivery, and manufacturing is largely devoted to merchandise that has been sold in advance. Some farm products, as sweet corn, tomatoes, and pumpkins, are sold to canners even in advance of cultivation, and in some instances canners furnish the seeds or plants for this purpose.

Price Guaranties

Some vendors offer their customers guaranties against price declines. This involves shifting risks that may normally be carried by the buyer to the seller. The practice offers protection to purchasers who are hesitant in placing orders because of fear of a falling market, an unfavorable change in consumer preferences, or a modification of styles or model numbers.

Subcontracting

An illustration of shifting risks by contracts is afforded by the building industry. General contractors in the building trades submit bids for the construction of a building on the basis of their knowledge of the business and of other factors including the cost of materials, labor conditions, and so on. The successful contractor, if he is so inclined, may then proceed immediately to let subcontracts for necessary materials and for the construction of all or most of the different parts of the building. In this manner, the general and original contractor shifts most of his risk to those who are presumably experts in their fields, unless his estimates have been incorrect or some subcontractors fail to perform their function.