Agribusiness Risk Management Strategies

Steve Hodges, Managing Director, African Agriculture Risk Management Servicesand Business Development Manager, Uganda Agribusiness Alliance

Supplier of inputs (seeds, etc.)

Farmer (primary producer)

Processor (value-added producer)

Trader/Broker/Distributor

Wholesaler

Retailer

Final Consumer

Definitions:Agricultural Value Chain:

The economic actors involved in getting farm products from the input and production to the end consumer.

Risks occur if any “link” in the value chain is weak, thus disabling the movement of agricultural products from beginning all the way to the end.

This is a simple version of a Value Chain

Supplier of inputs (seeds, etc.)

Farmer (primary producer)

Processor (value-added producer)

Trader/Broker/Distributor

Wholesaler

Retailer

Final Consumer

Agricultural Value Chain: Important Ancillary Actors benefiting the entire chain

Financiers

Insurers

Quality Inspectors

Extension and other Information Service Providers

What can threaten to reduce the success of an agribusiness enterprise?= RISK

Key Question for Agricultural Risk Assessment and Management:

Production Risks: what happens on the farm-improper seed selection-improper seed spacing-poor timing-reducing soil fertility-not managing weeds and pests-not managing water-not matching crops and livestock to the land-not diversifying farming operation-lack of access to sufficient land-lack of access to/high cost of needed equipment

Weather/Catastrophe Risks:

- too little rain

- too much rain

- too much wind

- too much heat

- too little heat

- change in difference between highest and lowest temperature during the day (isothermality)

Financial Management and Credit Risks- inadequate business, financial, or risk planning of farm enterprise- not knowing production costs compared to estimated revenue- no planning for possible financial crises- inadequate record-keeping- inadequate asset accumulation and management- too much debt

- no access to appropriate financing- no other income-producing enterprises- no access to or use of savings schemes- no attention to Value Chain approach to financing

Market and Price Risks

-inadequate understanding of markets and prices to determine best market channels

- not balancing potential profits with real risks to each market channel

-no access to working in a group to market

- no selling agreement with a purchasing partner

FAO, 2006, FAO/GIEWS review of crop and food situation in Uganda

Other Agriculture Value-Chain Risks

- besides risks at the levels of marketing to processors, traders, wholesalers or retailers, there can be other problems in the value-chain that threaten farm success

- for example, if a Ugandan farmer cannot find good quality simsim (sesame) seed that produces a good harvest; the Supplier link is the weak one in the Value Chain

Human Risks

- poor health of farmer and key farm workers

- farm workers not adequately trained or reliable

- poor personnel management of farm workers

- inadequate safety practices on the farm

Legal Risks:

- lack of understanding of contracts and sales agreements

- dishonest buyers

- lack of access to legal advice and recourse

- unclear land ownership

Policy Risks:

- programs and resources don't fully reach the local level

- changes in policy made without considering the impact/input of local farmers

- lack of coordination of policy, e.g. marketing policy for agriculture is in the Ministry of Trade, access to finance for agriculture doesn't really have a home

- lack of implementation of policy

Organizational Capacity Risks (of farmer organizations):

- inadequate governance, undemocratic decision-making

- infrequent meetings and poor communication

- inadequate strategic planning

- poor operational or financial management

- poor record-keeping and reporting systems

- poor accountability

- poor collaboration with other organizations/value-chain actors

- not having a market-based source of income (besides a donor or NGO subsidy)

- poorly functioning financial management systems

Instead of piecemeal approach, need a comprehensive approach

FarmingSuccess or

Failure

Production Risks

Weather Risks

Financial/Credit Risks

Market/Price RisksOther Value-Chain RisksHuman Risks

Legal Risks

Policy Risks

Organizational Capacity Risks

These Risks are Many...But they CAN Be Managed......By Mitigation of Agricultural Risk:

Mitigation = reducing the risk.

For example, farmers can mitigate (reduce) the risk of drought periods destroying their crops by using conservation farming methods to retain more water in the soil, or by developing irrigation.

...ByTransfer of Agricultural Risk:

Transfer = sharing the risk with others.

For example, risk can be shared with a company providing agricutural insurance; or through shared (group) transport, group market information collection or group marketing schemes.

...By Coping with Agricultural Risk:

Coping = reacting when risks materialize by financial capacity not related to the agricultural enterprise

For example, non-farm enterprises, or participation in savings schemes.

- A risk assessment process can begin at the local level to gather information about the enterprise and its immediate context

- May include: survey of farmers, neighbors, extension, cooperative leaders, banks and financial service providers

Risk Assessment Process

Supplementary Research on Risks

Not all risks are easily known at the local level; research is needed to supplement.

Important risks to research may include:

-- weather/climate change risks: too much rain, too little rain, too much wind

-- market/prices risks; trends in world harvests and prices

-- other industry trends

-- infrastructure plans (e.g. Road or electricity improvements)

-- official policy developments, including changes in government programs encouraging certain crops, changes in funding or policy for NAADS, changes in trade laws, etc.

Potential Severity of Impact

ProbabilityNegligible Moderate Considerable Critical Catastrophic

Highly Probable

Bush fires burn maize

Drought periods

ProbableDifficulty in transport

Occasional Theft of maize

Failure of farm organization

Drop in global prices

Remote Striga (witchweed)

Very high winds

Improbable Virus

Risk Management TOOL: Risk Prioritization Grid

After risk assessment and prioritization, develop customized risk management plan

Risk Management Plan

Many possible action steps:- training in record-keeping, business planning, risk management, conservation farming- add technologies (e.g. irrigation, new variety) - improving post-harvest handling and storage

Risk Management TOOL: Score Sheet for Selecting the Best Action Steps

Rate in each column according to: 1=Not true, 2=Low, 3=Medium, 4=High, 5=Very High

List Priority Risks Below (from high to low)

how effective

cost afford-ability

technical assistance available

timely culturally acceptable

1st:Action A:Action B:Action C:

2nd:Action A:Action B:Action C:

3rd:Action A:Action B:Action C:

4th:Action A:Action B:Action C:

5th:Action A:Action B:Action C:

Risk Management TOOL: Risk Management Action Plan

ActionWho does it

Technical resources needed

Material resources needed

Cost of action (estimated)

When does it start

When does it end

1.

2.

3.

4.

5.

6.

Available Risk Management Education Resources, Part I

AARMS Agricultural Risk Management Briefing Paper Seriesby Steve Hodges. Available by email, contact: stevehodges2011@gmail.com #1 Agricultural Risk Management Education Introduction#2 Agricultural Risk Management Assessment and Response#3 Agricultural Risk Management Services as a Key to Financial Inclusion#4 Organizational Capacity Risk#5 Catalysing Private-Sector Financial Support for Moving Small- and Medium-Scale Farmers into Commercial Agriculture: Lessons from Uganda and S. Sudan

aWhere.comFree access to weather data for Uganda, in detailed 9 km grids: precipitation, minimum and maximum temperature and humidity, maximum and morning wind speed, accumulative degree growing days. This can enable better prediction of harvest dates, better decisions about farming actions, better predictions of weather, pest, disease, and crop problems. Access can be by checking the website or can receive daily or weekly email notifications of weather data for locations you specify.

Available Risk Management Education Resources, Part II

Agri-Hub Uganda (http/apf-uganda.ning.com )This is an online, growing network of farmers' organisations, NGOs, financial institutes, research institutes, private and public sector actors and Dutch and other international development agencies, which are cooperating to stimulate the enhancement of farmer entrepreneurship in Uganda.

FARMD (agriskmanagementforum.org )FARMD (Forum for Agricultural Risk Management in Development) is a World Bank initiated network of practitioners seeking to enhance the sharing of experience and knowledge in agricultural risk management. FARMD provides a platform for sharing experiences and information amongst agricultural risk management practitioners, but also provides a space for learning, capacity building, and advancing knowledge in agricultural risk management.

Uganda Agribusiness AllianceThis is a new organisation with an Agribusiness Development Pipeline Programme selecting promising small and medium sized agribusinesses in Uganda (farming or anywhere along the value chain) to offer customized coaching, mentoring, and linkage to financing and investment.

For more information:

Email: stevehodges2011@gmail.comPhone: 0753-461348Mailing: PO Box 5645, Kampala, UgandaOffice: Uganda Agribusiness Alliance, Victoria House, Kira Road, Bukoto (opposite Kadic Hospital)Websites: http://stevehodges2011.wix.com/aarmswww.facebook.com/pages/African-Agriculture-Risk-Management-Services/287061661424850?bookmark_t=page

Steve Hodges Managing Director, African Agriculture Risk Management Services (AARMS)Business Development Manager, Uganda Agribusiness AllianceAARMS