Seasoned South African farmers are well acquainted with long-time risk factors that go hand in hand with the agricultural landscape. However, in a fast-changing environment with catalysts like cutting-edge technological advancements and climate change speeding up the evolution of this industry, there is an even greater need to manage risk effectively within these changing circumstances.
The nature of risk management
MC Loock, senior manager of agribusiness at Standard Bank, recently spoke on Grootplaas on kykNET, giving valuable insight into risk management. He explained why risk management should be an integral part of farming.
“Risk can be defined as the point between absolute certainty and absolute uncertainty, and is intertwined in the agricultural supply and demand chain. In the agricultural sector, risk originates from of a myriad of factors such as complex biological processes, market globalisation, established price-forming mechanisms and the strategic nature of food security, which also makes this sector a prime target for political interference.
“When looking at factors that further complicate the South African agricultural landscape, farmers are increasingly subject to global warming and shifts in consumer preferences. Growing concern towards ethical production as well as food security, a deregulated market environment and policy uncertainties regarding land reform, is but a few of our current risk role-players.”
Loock explained that risk management starts with a process of risk identification. “We identify relevant risk factors through an environmental analysis that looks at the political, economic, social, technological and legal sectors, and how they impact your business environment.
“When it comes to risk management pertaining to factors in the political environment specifically, the bank analyses the government’s impact on your business with regards to economic management and the efficacy of state departments in creating and maintaining new markets. Economic environmental factors that are assessed can include the per capita gross domestic product (GDP) growth rate, inflation, interest rates and of course exchange rates.
“Social factors that impact agricultural companies the most, are often dependent on population trends and can include variables such as education, mobility and the availability of knowledgeable workers within the agricultural industry,” he added.
The most critical environment within the agricultural sector that is really fostering growth and advancement, he explained, is technology. “Global positioning and information technologies, in particular, helps us to apply new growth techniques and allows for sufficient monitoring throughout the value chain, which also contributes enormously to traceability.”
Risk management techniques
Loock explained that when it comes to risk management techniques available to farmers, there is a huge emphasis on diversification that should be implemented throughout various phases in the farming process.
“Diversification can be applied to a myriad of different fields which include production, marketing and investment. Ultimately, we also look at diversification within the management of your income and how best to invest your money to manage risk effectively.”
He also elaborated on the second risk management technique which has to do with vertical integration that enables farmers to take control of more than one production or distribution phase. “The goal of vertical integration is to shorten the communicative distance between the producer and the consumer, thereby capturing critical information that often gets lost within the production or marketing value chain. This can be achieved through product value addition or investment.”
The last risk management technique that Loock touched on, had to do with pre-season contracts. “Pre-season production contracts can specify the type of product to be planted, production techniques, the date of availability, product price and terms of payment. Through implementing these contracts, we can accurately establish a supply and demand chain strategy which leads to greater price stability.”
Establishing a solid business plan
Loock says that one of the most sought-after requirements when it comes to financial institutions, is finding a bank that truly understands your unique business. “We understand that a business begins with a bank’s ability to accurately determine the impact of various risk factors on that business’s environment. Establishing a solid business plan helps to identify these risk factors, which can then be further discussed during the credit application process.
“However, the most crucial factor when it comes to successful risk management, relates to the competency of the company owner to effectively apply risk management techniques to the various sectors within the company. The bank will normally analyse financial risk in terms of the company’s financial position. “Once a risk assessment has been performed, there may also be additional terms and conditions set forth by the bank. In some cases, the bank may invest in additional security to make the proposed credit application worthwhile for that specific financial institution.”
Adapting in a changing environment
With South African farmers being continually exposed to the impact of climate change, Loock said that current predictions regarding global warming are estimated to affect the spread of rainfall throughout the country. “We are expecting an increase in the duration of drier periods throughout the year and increased, short bursts of rainfall during wet periods, which could exacerbate flooding. Farmers are at risk of falling victim to an increase of water shortages, which means water will have to be used strategically and sparingly.
“This can be done by: Creating greater storage capacity on farms; by using cultivars that are better suited to drier environments; and by implementing production techniques that prioritise moisture retention. When it comes to managing risks associated with flooding, attention to weather patterns can help farmers to pro-actively herd livestock into safe environments.
“Risk management pertaining to climate change should also include the maintenance of certain infrastructures to curb preventable problems such as soil erosion,” Loock concluded. – Standard Bank
For more information contact 011 721 9089, or send an email to SBSA.email@example.com. You can also visit the website at www.standardbank.co.za/agribusiness