Professional Documents
Culture Documents
In a Nutshell
December 2006
In a Nutshell is designed to stimulate interest and
inform on issues and topics of importance to sustainable
agricultural development in Caribbean countries.
This is the age where knowledge and information are critical for success.
Information is central to our decisions, social interactions and economic
actions. It informs and educates us to those attributes that will empower
and enable us to sustain ourselves and flourish, instead of merely existing.
It is the general opinion that farmers and other 'agripreneurs' know their
risks and practice some form of risk management in their operations.
However, the annual impacts of such 'known' and expected risks,
especially natural events, are usually severe, impacting the agripreneur in
much the same manner. This implies that risk management and mitigation
systems are either not in place or addressed on an ad-hoc basis. In most
cases, the issue of 'risk' is not linked to the issue of 'opportunity' and risk
management, especially on the farm, is based on traditional knowledge and
practices, and treated more as a defensive response.
This issue discusses risk in agriculture, with special focus on the farm. It
synthesises the wide body of literature and information on this critical
topic into a simple form that can be more readily understood by students
and young farmers. It also seeks to stimulate thinking and more
concerted and collective actions among the more experienced
agripreneurs and policy makers.
Tolerating Risks
The Agripeneur’s risk management choices reflect his/her
level of risk tolerance. Understanding these choices is
important in making risk management decisions that match or
closely reflect the tolerance for risk.
Agriculture’s Risks
Production Risks:
These risks are known and present
in production along the entire
supply chain. They affect expected
yields and actual output and
impact on income gains or losses.
These include natural events
(hurricanes, drought, pests and
diseases), prices (land, labour,
equipment, machinery and capital),
standards and regulations
(production and process methods,
quality and safety), equipment and
technology efficiencies, market
dynamics (increasing scale, specialisation
and chain consolidation) and strategic
risks (choosing inappropriate technology).
Production risks cannot be completely
eliminated, but could be reduced.
Marketing Risks:
These are known and present,
especially in handling and
distribution. These include poor
market information, marketing
strategies and skills, poor
implementation and process
problems in distribution, weather
conditions in export markets,
disruptions in transportation,
rising costs of business, stringent
standards and regulations. The
shift of power to the consumer and a
demand-driven chain has escalated
these risks. They cannot be completely
eliminated, but could be managed.
Strategic marketing can create and
sustain consumer loyalty to a product
and transform production activities into
financial success.
In a Nutshell 6
Institutional Risks:
These relate to changes in government
policies and interventions. The structural
adjustment programmes of the 1970s
and 1980s were serious national
institutional risks which adversely
impacted agriculture in a direct and
significant manner in affected Caribbean
countries. Other such risks include the
adequacy and efficiency of business
development support for agriculture,
including enforcement of safety, quality
and environmental regulations and risk
mitigation. These risks have legal and
social consequences that affect all
investments and operations along the
entire production-marketing chain.
Institutional risks greatly affect the
Agripreneur’s decision-making.
Personal Risks:
These risks relate to the impact on
health and physical well-being in the
process of carrying out the business of
agriculture. Such risks are relatively
high on the farm and can arise from
improper use of machinery and
chemicals, lack of awareness of safe
practices and unavailability or
inappropriateness of protective
equipment. Other human sources of
risk are associated with labour and
management dis-functions, such as,
health problems and industrial
disputes, which disrupt the
production cycle and can lead to
losses.
Financial Risks:
These risks relate to the ability to
meet cash flow needs in a timely
manner and to grow equity. They
also include the rising costs and
increasing unavailability of
financing, investment and capital
and the possibility of partial or full
loss from natural or man-made
events. Cash flows are especially
important given the variety of ongoing
farm obligations (eg. cash input costs,
rentals, tax payments, debt
repayment and family living expenses.
Since the substantial contraction of
Caribbean traditional agricultural
export industries and slow pace of
agricultural diversification, it has
become increasingly difficult to
obtain adequate financing, at
reasonable rates and terms,
particularly for primary production.
Financial risks increase in the absence of
adequate mitigating mechanisms and
protective arrangements for the other major
risk categories, particularly production risks.
Who?
▪ The Individual. Such risks are isolated
to an individual business. They will have
adverse consequences on the enterprise,
they may not necessarily affect the
entire industry, chain or sector.
When?
▪ Everyday. Business faces normal risks on
a regular basis. These risks may be
short-lasting, such as, bad weather, fire,
disease, poor equipment, industrial disputes,
price spikes, loss of markets, product recalls,
disruptions in export transportation, etc.
However, over time, frequent and/or repeated
occurrences will affect the profitability
of a business.
Where?
The Industry/Chain. These risks can
have an adverse impact on an individual
farm/firm, an entire industry and in
extreme cases, an entire chain and sub-
sector (if a major industry eg. bananas).
Such risks (pests, free trade agreement)
may originate from an external source (other
country), with widespread and longer-
lasting negative effects.
How?
▪ Unexpected and Extreme. These risks
can occur suddenly (Avain flu influenza,
hurricane or volcano). They effects on the
entire industry or sub-sector can be
rapid and destructive, requiring an
extreme response (such as total
destruction of Avian Flu infected flock),
with long-term impacts on economic viability.
These risks are, however, are generally rare.
In a Nutshell 9
Diversification
Diversification - the combining of
different production options - is by
its nature, a defensive strategy. It is
an effective way to reduce large
year-to-year fluctuations in income
and financial risks. It can ensure
adequate cash flow for meeting
production costs, debt obligations
and family living expenses. However,
diversification is becoming
increasingly costly, as capital
investment requirements become
greater.
Insurance
Management of yield or price risk,
through crop insurance, shifts the
Agripreneur’s risk to others for a price,
i.e., the insurance premium. Crop
insurance is a risk management tool
that reduces the direct losses to the
producer and offers the opportunity for
more consistent gains. Its benefits
include ensuring a reliable level of cash
flow and allowing more flexibility in
business and marketing plans.
If some part of the expected
production can be insured, then that
part can be forward-priced with
greater certainty, creating a more
predictable level of revenue.
In a Nutshell 11
Contract Production
Contract production is normally
associated with vertical integration,
i.e., to coordinate all aspects of
production from farm to table. This is
common in the poultry and livestock
industries. A major advantage for the
farm producer is that a market for the
output and, often, a favorable price is
guaranteed. It also protects against
future price reductions. A disadvantage
is that the producer loses the
opportunity of benefiting from the
potential for future price increases,
since the sale of the product is fixed by
the contract. The loss of flexibility and
potential profit opportunities is the cost
of receiving a predictable market for
sale of product and cash flow.
Management Plans
Risk management risk begins with
sound integrated farm management
planning which must define the goals
and objectives of the enterprise and
develop business and marketing plans.
A good understanding of production
costs and marketing strategies are a
critical part of a sound farm
management. Management decisions
should consider the impacts they will
have on the production, financial, legal
and human resource aspects of the
business. A strong business and marketing plan
can significantly improve the possibilities for
accessing financing and investment.
Issue #12
December 2006
ISSN-0245-4746 A2/TT/05/06
Prepared by the
Trade Policy and Negotiations Programme
IICA Caribbean
Diana Francis
Regional Specialist
and
Richard Rampersaud
Research Assistant
Caribbean Regional Agricultural Policy Network (CaRAPN)
Printing:
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