OverviewOverview

William DickCommodity Risk Management Group

Agriculture and Rural Development DepartmentWorld Bank

Johannesburg, April 2009

Managing Risk in Financing Agriculture - Expert MeetingManaging Risk in Financing Agriculture - Expert Meeting

ALL ACP AGRICULTURAL COMMODITIES PROGRAMME

EUROPEAN DEVELOPMENT FUND ACP GROUP OF STATES

Agri/Agbiz = Risky BusinessAgri/Agbiz = Risky Business

Risk + uncertainty widespread in food/ agri systemRisk + uncertainty widespread in food/ agri system:: Agro-climatic factorsAgro-climatic factors Complex biological/environmental processesComplex biological/environmental processes Geographical span of supply chainsGeographical span of supply chains Political economy of food/agriculturePolitical economy of food/agriculture

Major structural and demographic changesMajor structural and demographic changes

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

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

bioterrorism, environmental imprint + social concernsbioterrorism, environmental imprint + social concerns

3

Managing Agricultural Risk Managing Agricultural Risk

TIME FRAMETIME FRAME

Before the Event Before the Event

EX ANTEEX ANTE Event OccursEvent Occurs

After the Event After the Event

EX POSTEX POST

STRATEGIESSTRATEGIES

INFORMALIndividual- or

Community-based

FORMALMarket- or

Policy-based

INFORMALIndividual- or

Community-based

FORMALMarket- or

Policy-based

Issues common to finance and insuranceIssues common to finance and insurance

Needs for risk assessment and Needs for risk assessment and datadata

Ex ante risk planning and ex Ex ante risk planning and ex post risk solutions (financing)post risk solutions (financing)

Risk retention, risk transfer, Risk retention, risk transfer, “layering” of risk“layering” of risk

Technical, organisational and Technical, organisational and financial planningfinancial planning

Packaging/bundling of credit Packaging/bundling of credit and insuranceand insurance

Entry points and distributionEntry points and distribution Appropriate insurance Appropriate insurance

productsproducts Collateral enhancementCollateral enhancement Legal and regulatoryLegal and regulatory Public/private rolesPublic/private roles Profitability in the supply chainProfitability in the supply chain

Country Agricultural Risk Management Model

Country Agricultural Risk

Management

Agri-business segmentation

Social vs commercial insurance Traditional farming sector Emerging farming sector Commercial farming sector

Agricultural risk assessment

Risk identification Risk quantification Probabilistic agricultural risk model

Agricultural risk financing

Risk layering

Insurance index Insurance pool Insurance and rural finance

Institutional capacity building

Data management

Regulatory/supervisory framework Information and education Technical expertise Program administration and monitoring

Effect FactorsRisk

Lower yields and loss of income/assets

Rainfall and temperature variability or extreme eventWeather

Lower prices and loss of income

Market forces inside and outside the country; local and international supply and demand

Price

Reduced yield; loss of assets/income

Disease, pest, contaminationBiology

Loss of incomeIllness, death, injuryLabor

Loss of income; market dissatisfaction

Breakdowns, bottlenecks, price shifts for product storage and transport

Logistical

Changes in costs, taxes and market access

Regulatory changes or inconsistent application, both inside and outside the country

Regulatory/Policy

Major Agricultural (Supply Chain) Risks