IFC Agribusiness Effective Risk Management Frameworks for the Agriculture Sector

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IFC Agribusiness Effective Risk Management Frameworks for the Agriculture Sector The International Economic Forum Of The Americas Palm Beach Strategic Forum By Fabiana Feld, Chief Investment Officer. Risk in Agriculture. Agriculture is one of the riskiest sectors of economic activity . - PowerPoint PPT Presentation

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IFC AgribusinessEffective Risk Management Frameworks for the Agriculture SectorThe International Economic Forum Of The Americas Palm Beach Strategic Forum

By Fabiana Feld, Chief Investment Officer

#CONFIDENTIAL1Risk in AgriculturePresentation TitleAgriculture 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.#CONFIDENTIALTypes of Agricultural RisksRisk + Uncertainty widespread in food/ agri system: Agroclimatic factorsComplex biological/environmental processes Geographical span of supply chains Political economy of food/agriculture

Major structural and demographic changes

Risky business = old risks + new risksOld Risks: weather, price variability, pests, logistical bottlenecks, food safety hazards, policy shiftsNew Risks: climate change, new disease transmission, biosafety, bioterrorism, environmental imprint + social concernsPresentation Title#CONFIDENTIALMajor 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 TitleEXAMPLES

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 deliveryChanges 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

#CONFIDENTIALComponents of a Risk Management Framework for Agriculture1) 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 Title2) 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

#CONFIDENTIALRisk Management Strategies Mitigation Activities designed to reduce the likelihood of an adverse event or reduce the severity of actual lossesirrigationuse of resistant seedsimproved early warning systemsadoption of better agronomic practices

Transfer of risk to a willing party for a fee or premiumcommercial insurance hedging

Coping or improving the resilience to withstand and cope with events, through ex-ante preparation. social safety net programsbuffer funds savingsstrategic reservescontingent financingPresentation Title#CONFIDENTIALA risk layering approach, based on the probability of occurrence and potential losses, is used to select an appropriate risk management strategy.

Presentation Title#CONFIDENTIALRisk Management Implementation InstrumentsConcrete action requires deployment of several instruments:1. Agricultural Investments: Financial investments in irrigation infrastructureDrought and pest tolerant seed varietiesSoil and water conservationWeather infrastructureInvestment in improving systems (e.g. agriculture extension system or disease surveillance system)2. Technical Assistance: for building capacity of local stakeholdersTraining in price risk managementFeasibility studies for various instrumentsFlood risk modeling workDeveloping early warning systems3. Policy support: Changes in policy to improve access to agricultural inputsChange in information policy to make weather information easily accessible to allGovernment procurement, storage, and grains release policies to manage strategic reserves

Presentation Title#CONFIDENTIAL

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