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AgriBusiness“Farming fertile minds …… Growing fertile futures”
Risk Management
2 April 2009
“You cannot manage risks until you understand them.”
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Contents
1. Market principles within S A Agriculture.
2. Agricultural finance at a glance.
3. Funding requirements for a farming venture.
4. Risk and uncertainty
5. Information, Information- a perfect world (?)
6. Risk types and consequences
7. Risk Mitigation
8. Management Process
9. Conclusion
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Market principles within SA’s agriculture
Comments
• South African farmers face a 60% plus price exposure to the outside world and are therefore by implication global players in a global market.
• They therefore have very little control over pricing levels and tend to be price takers, with prices ranging between import parity and export parity depending on local supply and demand resulting in increased price volatility
• Factors influencing prices over which they have no control are international production trends, international farming subsidies, exchange rates, import and export tariffs.
• Production risk due to nature also contributes to production volatility which in turn lead to an increase in price volatility
• Farmers therefore have to manage PRICE and PRODUCTION if they want to make a success of their business
SA Rainfall trends
0
200
400
600
800
1000
Rai
n(m
m)
Rain 3 yr Avg Long-term Avg
SA Agricultural's Exposure to the International Market
05,000
10,00015,00020,00025,00030,00035,00040,00045,000
1980 1985 1990 1995 2000 2005
(R '0
00
)
0%
10%
20%
30%
40%
50%
60%
70%
80%
Exports Imports Import + Exports as % of GPV
SA yellow maize prices (R/ton
200
700
1,200
1,700
2,200
2,700
3,200
3,700
J an-03 J an-04 J an-05 J an-06 J an-07 J an-08 J an-09 J an-10
Import Parity Export Parity Domestic
Cost curve
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Market principles within agriculture Cost curve
In the long term agriculture is experiencing a cost curve of approximately
3% per annum (The price of Farming requisites increases faster than
producer prices however for 2008/09 season a cost curve of more than
30% is expected).
To survive this, farmers need to become more productive (increase output
in relation to inputs) this is mainly done by:
• Improving production efficiencies (use of technology)
• Value adding
• Lowering fixed costs (economies of scale)
World agriculture is poised to enter a new growth phase that
will be much greater than colonization and industrialization.
• During the period of industrialization after the second world war,
agricultural production expanded exponentially, compared to the
growth in population (due to the development of fertilizer and
production machinery).
• Production of coarse grains, beef and mutton however peaked during
mid eighties due to availability of natural resources. Commodities
like poultry and pork continued to grow as they were able to utilize
surplus coarse grains.
• Production has once again started to increase due to advances in
bio-technology (GMOS etc.)
Production volumes will continue to increase thus improving
the survival potential of agriculture in general
Maize yield
-
1.00
2.00
3.00
4.00
5.00
6.00
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
(to
n/h
a)
World yields SA yields
Maize yield
-
1.00
2.00
3.00
4.00
5.00
6.00
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
(to
n/h
a)
World yields SA yields
Agricultural Cost curve trends (Index 1980 = 100)
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Gross producer value Input cost
Finance
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Agricultural Finance at a Glance
Farm income and expenditure
0
2000040000
60000
80000100000
120000
140000160000
180000
69/70 73/74 77/78 81/82 85/86 89/90 93/94 97/98 01/02 05/06 09/10
Yearly Farm Debt Commitment Expenditure on InputsGross Producer Income Net Farm IncomeValue of Fixed Assets 50% margin
Finance farm level
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Capital requirements for a farming venture
Interest payments
capital payments
Annual production cost
Gross Farm Income
Net margin
Overheads and living costs
Based on surplus security
And surplus cash
Long-term loans based
on security and surplus capital
Pro
du
ctio
n f
inan
ce
Bas
ed o
n in
sura
nce
and
cas
hfl
ow
J1 J2 J3 J4 J5 etc.
Val
ue (
R)
Net loss
UNCERTAINTY
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Uncertainty refers to imperfect knowledge such as when the future outcomes of a decision are unknown
Risk and Uncertainty
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Utilize and build Info Intelligence and use it as decision base !!!!!!!
All infoNice hair
Perfect World (?) with information
Rainfall
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South Africa - Rainfall
•Scenario-based risk identification
Create and analyse various scenarios that trigger a threat
Probability of rainfall
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Probability (%)of Rainfall example Jul 08- Dec 08 as risk decision
Jul 08 Aug 08 Sep 08
Okt 08 Nov 08 Dec 08
Yields
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Maize scenario – answer sensitivity analysis questions
Maize yield
0
1
2
3
4
5
6
198
0/8
1
198
1/8
2
198
2/8
3
198
3/8
4
198
4/8
5
198
5/8
6
198
6/8
7
198
7/8
8
198
8/8
9
198
9/9
0
199
0/9
1
199
1/9
2
199
2/9
3
199
3/9
4
199
4/9
5
199
5/9
6
199
6/9
7
199
7/9
8
199
8/9
9
199
9/0
0
200
0/0
1
g20
01/0
2
200
2/0
3
200
3/0
4
200
4/0
5
200
5/0
6
season
t/h
a
Lichtenburg Heidelberg
Always take time to ask: “What if?”
Industry indicators
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Market Industry Indicators as example
INDUSTRY INDUSTRY RISK PRICE MOVEMENT INPUT COST INPUT COST MARGININDICATOR MOVEMENT MOVEMENT
2008 2009 2008/09 2008/09 2009/10 2008/09
Maize Sideways 38 - 46 % 10 - 15 %
Wheat Sideways 26 - 40 % 9 - 14 %
Sunflower Sideways 29 - 46 % 10 - 15 %
Sugar Sideways 45 - 50 % 12 - 16 %
Table Grapes Sideways 18 -22 % 8 -13 %
Wine Grapes Sideways 16 - 20 % 10 - 14 %
Deciduous Fuit Sideways 38 - 42 % 8 - 12 %
Citrus Sideways 23 - 28 % 10 - 14 %
Vegetables Sideways 33 - 38 % 10 - 14 %
Beef Sideways 8 - 10 % 8 - 10 %
Mutton Sideways 8 - 10 % 8 - 10 %
Pork Sideways 9 - 12 % 9 - 12 %
Dairy Upward 15-18% 10-15 %
Poultry Sideways 11 - 15 % 10 - 15 %
Timber Sideways 16 - 20 % 7 - 9 %
•Analyse your industry •Scan the horizon, looking for new issues•Regularly challenge your on-going process to identify new risks•Gather information relevant to agriculture business •Look both in the past and in the future for past events and future trends.
Are there things causing discomfort or keeping you awake at night?
Risk drivers
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Summary of Risks and Consequences
Types of risks Risk Consequences Natural : Risk of damage through Wind, storms, floods , drought etc.
Property damage Business interruption Personal liability
Resource risk: Risks associated with diminishing natural resources which influence profitability of business
Soil erosion Salienation Bush encroachment Loss of water quality and
quantity Persistent droughts
Production risks : risks which influence production processes and profitability
Diseases Availability of labour Availability of inputs Climatic conditions Mechanical breakdowns Technology
Market Risks: risks of price and volume fluctuations
Price decreases Produce quality Market access Exchange rate
fluctuations Consumer preference Input costs increases
Financial risks: Risks influencing the financial performance of a farming entity
Insufficient financial information
Insufficient cash flow Interest rates fluctuations Availibity of credit ? Debt structure
Types of risks Risk Consequences Strategy risk : risk which influence long term profitability
Change in Governments policy
Change in economic markets Change in technology Regulatory requirements
Human resource risks: risks in human resource capacity on the farm
Shortage to human resources Ineffective management Shortage to key staff Staff not motivated
Social risks : risks influenced by the business environment
Market reputation risk Loss in production due to
bad relations Loss to grow the business Food safety issues
Business Relations risk : risks influenced by business relations
Law risks Break in supply chain Trade disputes
Risk mitigation
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RISK MITIGATION
1. Supply risk
2. Price risk
3. Commodity risk (quality)
4. Ownership
5. Operational risk
6. Payment risk
7. Market risk
1. Finance – harvested commodity, warehouse receipt / silo
certificate. Contract growing.
2. Finance at discounted values – trigger levels or hedge with
futures.
3. Quality confirmation.
4. Advance funds to owner of the commodity
5. Transact with client who has a track record.
6. Ensure the prospective buyer has sufficient lines for
payment of the client’s stock
7. Production linked to market requirements
Risk Mitigation
Risk management
process
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Identify Risks
Continuously Improve
Risk Management
Monitor Risk
Response
Information for
Effective Decisions
Implement Risk
Response
Develop Risk
Responses
AssessRisks
Risk Management Process
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Identify finance opportunities taking risk into consideration
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No Risk Management-poor decisions and mitigation
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Result of Risk management and appropriate risk mitigation
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Conclusion
• The challenge for the Risk managers is to decide whether it is a reasonable risk and the information available to make decisions.
• In normal or good years, Agriculture will make a good profit, but in bad years the risk of poor returns could be threatening however this can be circumvented through risk mitigation tools available.
• A good Bank Risk manager will examine all the possible sources of risk and adopt a strategy that reduces the impact of a poor outcome.
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Summary -Finance opportunities, use info for decisions, risk mitigation and Score
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THANK YOU for the opportunity to share some ideas
Disclaimer: Although everything has been done to ensure the accuracy of the information, the Bank takes no responsibility for actions or losses that might occur due to the usage of this information.