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 isone 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.
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
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management decisions; poor quality control; forecast and planning errors; breakdowns in farm or farm equipment; use of outdated seeds; lack of preparation to change product, process, markets • Uncertain monetary, fiscal, and tax policies; uncertain policies on trade, market, or land and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 Major Risks in Agri Supply Chains TYPE OF RISK • Weather • Natural disaster (including extreme weather events) • Biology and environment • Market • Logistics and infrastructure • Management and operations • Policy and institutions • Politics
Components of a Risk Management Framework for Agriculture 2) Agricultural Risk Assessment • Risk identification • Risk quantification • Vulnerability Assessments • Risk Prioritization 4) Resources • Data management Regulatory/supervisory framework • Information and education • Technical expertise • Program administration and monitoring 1) Identify Objectives/ target • Social vs. commercial objective • Target groups: • Traditional crops sub-sector • Emerging crops sub-sector • Commercial farming segment • Subsistence farming segment 3) Risk Management Strategy • Mitigation • Transfer • Coping Strategies are client/supply chain/country specific
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
A risk layering approach, based on the probability of occurrence and potential losses, is used to select an appropriate risk management strategy.
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