IFC AgribusinessEffective Risk Management

Frameworks for the Agriculture Sector

The International Economic Forum Of The Americas Palm Beach Strategic Forum

By Fabiana Feld, Chief Investment Officer

2

CONFIDENTIAL

Risk in Agriculture

Presentation Title

•Agriculture is one of the riskiest sectors of economic activity.

•It is marked by pervasive and increasing risks that result from structural, demographic, market, and institutional changes, some of which are associated with globalization and the creation of new technologies.

•Managing risk, not eliminating it, should be the producers’ and governments’ objective.

3

CONFIDENTIAL

Types of Agricultural Risks•Risk + Uncertainty widespread in food/ agri system:

Agro‐climatic factors Complex biological/environmental processes Geographical span of supply chains Political economy of food/agriculture

• Major structural and demographic changes

• Risky business = ‘old risks’ + ‘new risks’ ‘Old Risks’: weather, price variability, pests, logistical bottlenecks,

food safety hazards, policy shifts ‘New Risks’: climate change, new disease transmission, biosafety,

bioterrorism, environmental imprint + social concerns

Presentation Title

4

CONFIDENTIAL

Major Risks in Agri Supply ChainsTYPE OF RISK

• Weather

• Natural disaster (including extreme weather events)

• Biology and environment

• Market

• Logistics and infrastructure

• Management and operations

• Policy and institutions

• Politics

Presentation Title

EXAMPLES

• Periodic deficit or excess rainfall, varying temperatures, hail storms, strong winds

• Major floods, droughts, hurricanes, cyclones, typhoons, earthquakes, volcanic activity

• Crop/livestock pests and diseases; contamination caused by poor sanitation, humans, or illnesses; contamination affecting food safety, natural resources/environment, or production and processing

• Changes in supply or demand that impact domestic or international prices of inputs or outputs; changes in demand for quantity or quality attributes, food safety requirements, or timing of product delivery

• Changes in transportation, communication, or energy costs; undependable transportation, communication, or energy infrastructure; physical destruction, conflicts, or labor disputes affecting transportation, communication, energy infrastructure

• Poor management decisions; poor quality control; forecast and planning errors; breakdowns in farm or farm equipment; use of outdated seeds; lack of preparation to change product, process, markets

• Uncertain monetary, fiscal, and tax policies; uncertain policies on trade, market, or land and tenure systems; weak institutional capacity to implement regulatory mandates

• Security-related risks; uncertainty associated with sociopolitical instability within a country or in neighboring countries; interruption of trade due to disputes with other countries; nationalization or confiscation of assets

5

CONFIDENTIAL

Components of a Risk Management Framework for Agriculture

1) Identify Objectives/ target • Social vs. commercial objectiveTarget groups:Traditional crops sub-sector Emerging crops sub-sectorCommercial farming segment Subsistence farming segment

3) Risk Management Strategy Mitigation Transfer Coping

Presentation Title

2) Agricultural Risk Assessment Risk identificationRisk quantification Vulnerability AssessmentsRisk Prioritization

4) Resources Data management Regulatory/supervisory framework

Information and education Technical expertiseProgram administration and monitoring Strategies are client/supply chain/country

specific

6

CONFIDENTIAL

Risk Management Strategies• Mitigation – Activities designed to reduce the likelihood of an adverse event or reduce the severity of actual losses

irrigation use of resistant seeds improved early warning systems adoption of better agronomic practices

• Transfer of risk to a willing party for a fee or premium commercial insurance hedging

• Coping or improving the resilience to withstand and cope with events, through ex-ante preparation.

social safety net programs buffer funds savings strategic reserves contingent financing

Presentation Title

7

CONFIDENTIAL

A risk layering approach, based on the probability of occurrence and potential losses, is used to select an appropriate

risk management strategy.

Presentation Title

8

CONFIDENTIAL

Risk Management Implementation Instruments

Concrete action requires deployment of several instruments:1. Agricultural Investments:

Financial investments in irrigation infrastructure Drought and pest tolerant seed varieties Soil and water conservation Weather infrastructure Investment in improving systems (e.g. agriculture extension system or

disease surveillance system)2. Technical Assistance: for building capacity of local stakeholders

Training in price risk management Feasibility studies for various instruments Flood risk modeling work Developing early warning systems

3. Policy support: Changes in policy to improve access to agricultural inputs Change in information policy to make weather information easily accessible

to all Government procurement, storage, and grains release policies to manage

strategic reserves

Presentation Title