The value of understanding Risk management in Agribusiness.

Risks are unforeseen uncertainties that arise in business to adversely affect the business to submit to losses and threaten business survival. Risks are uncertain and certain possibilities that hamper the survival of a business from production to sales. Risk in that regard needs to be managed and the first step to that is the identification and analysis of risks, knowing the types of risks that occur and how to mitigate them. Risk can either be business risk or financial risks, therefore, business risks being risks that affect the business in terms of technical, operational and market business environment. Financial risks are risks the business incurs financially such as credit and liquidity risks, to mention a few. Risk can also occur because of changing agricultural factors such as environmental conditions (land and water), marketing and policies developed by the government. Because in business risks are always there, and in most cases are detrimental, there is a need to prevent, eradicate, manage, maintain and control them. They can be managed through risk management techniques that include the need to avoid, retain, transfer, reduce impacts resulting from risks occurrence. Risk can be managed depending on its degree and impacts as they are not the same. In this article we are going to focus on risks, approaches and management we face in agriculture as the focus is on the business side of agriculture.

Type of risks

Business risk in agriculture

Business risks are probable possibilities and risks that occur within a business and threaten its survival. Business risks are simply risks a business cannot avoid and it is concerned with a company's production, ability to make sales in order to meet expenses as well as obtain income. Business risks are risks that are incurred when the business is unable to pay expenses for production operations. That means when production, sales and income become hampered that is a business risk. Business risks occur in two ways, technical and market risk. Technical risks are technical unforeseen, and uncertain possibilities that can occur within a business, which have an impact on business productions, and operations leading to reduced yields, quantity and quality of supply. Technical risks provide limitations in agriculture by lowering as well as reducing expected and projected yields as due to a number of technical factors. These risks occur due technology , technical management, human resources and environmental factors that happen in the business environment internally as well as externally.

Technical factors that lead to technical risks occur because of improper business structure, strategy and plans which do not outline every business dynamic properly. Business decisions and not made in a realistic, smart, attainable, measured and time bound way will result in fluctuation of production and sales. Management factors include insufficient support, communication, management, maintenance, control and coordination within the business structure, mismanagement will indeed hamper production efficiency. Furthermore lack of research, creativity, and innovation also contributes to technical risks experienced by business within the agribusiness sector, thus may impact the business survival in terms of competing in the market (lack of diversity, consumer satisfaction and brand appeal). Human resources factors such as death, disease, divorce or disagreement are risks that can affect the business adversely as it reduces production efficiency. Technological risks are uncertainties that arise from using technology and lead to technical risks as quantity, quality produce can be adversely affected as machinery can face breakdowns.

Environmental factors such as climate, drought, frost, hail or floods negatively impact productions especially in agribusiness especially due to global warming. Furthermore, pest and disease outbreaks lead to the occurrence of technical risks as they affect production quantity and quality. Examples of technical risks include equipment getting damaged, plants killed by frost, and diseases outbreak in the poultry industry. All these examples are unforeseen therefore technical risks impact the business performance and supply space within the market spectrum. Market risks are risks that business in agribusiness experience due to developments in the market, its factors, conditions, climate, segment and environment. The market evolves, market conditions transition, demand, and supply with consumer preferences, behavior as well as demeanor gradually changing , leading to shifts in the market environment. This includes market population, size, trends and patterns that result in market risks which can hamper the business survival especially when they occur. Substantial developments in the market factors such as uncertain market, price uncertainty, direct equity, stock price(investment), interest rate (volatility, geopolitical economic situations such as inflation), foreign exchange rate(fluctuations) and commodity (corn, crude oil, etc.) are risks contributing to market risk in agribusiness. Technology, and platforms in the market environment can pose adverse impacts on sales, supply and demand of a product.

Technology in marketing keeps on changing and failure to adapt to it leads to adverse effects, risk of market and competitive advantage. Lack of a marketing plan and insufficient funds towards marketing leads to great market risk as your product will not be well represented in the market. Lastly, policies and regulations in the market especially when it comes to export pose a risk threat to agribusiness as they create policies with standards so high, producers can’t comply. The impacts of market risks is that they result in financial loss, and loss in market position due to all these variables, as well as dimensions within the market spectrum. This is because they affect direct sales, as less market means less product sales, which is pretty much a failure of business goals that impact survival. Market risks are not predictable thus they cannot be eliminated but minimized. Anything or any uncertainty that causes a loss in market is associated directly with market risks examples of marketing risks include lack of transition to 4th industrial revolution advertising, changes from retail to e-commerce leads to market risks in the retail industry, failure to recognize target market, and increase of fuel on prices increasing price of products.

Financial risks

Financial risk is another common risk that business in agriculture face in risk management as they can make or fail the business. Financial risks are the risks a business faces due to financial reasons, situations and environment within a business. The risks are merely the business potential or probability of losing or gaining money. Remember a risk can either be detrimental to a business or positive and beneficial to a business. Financial risks can be compulsive, inherent, at times affordable and acceptable. The risk is compulsive as running a business itself is a financial risk and sometimes small losses result in big benefits like improved income, opportunities and markets. These risks are acceptable because most financial risks have to be encountered or accounted for.

Financial risks are sometimes affordable, but all this depends on the extent or degree of risk as well as impact, meaning the bigger the risk the more costly it can be. Financial risks like bankruptcy and liquidation of assets sometimes lead to a fall of a company. The debt issue is one part of financial risks thus the types of financial risks that occur within a business in agriculture are credit, liquidity, and sovereign risks to mention a few. Credit is a financial risk that a business faces due to using and providing credit. Most producers use credit when paying for inputs and failure to pay for those credits poses financial risks to the farmer. Producers also provide consumers with credit when buying their commodity and when consumers fail to pay for their credit, the business faces financial risk. I mean a business cannot survive if it is owed revenue because it has to pay for its expenses or expenditures, especially fixed costs.

Liquidity risk is another financial risk involving assets and operating liquidity risks. Asset liquidity risks are mainly financial risks that occur in a business due to loss of an asset. This is normally done when the business does not have the financial capital to pay for debts and thus converting that asset into cash by selling it in the market to make ends meet. Operational liquidity risk are financial risks that happen due to the everyday cash flow and the ability for the business to perform transactions (producing and selling of a product). In this regard when the company isn’t doing well in terms of production and sales, an asset will be traded to make ends meet or fill the void of risk. Sovereign risks are risks that are obtained by the business due to loans or debt encountered.

This financial risk occurs when businesses take debts or loans to gain financial leverage and fail to pay for their debts. Some companies do not have enough capital or the increase of input costs can adversely impact a business therefore to mitigate as well as ensure sustainability of the business and its operations, they are subjected to loans and debts. Debts can be helpful but they are regarded as financial risks especially when businesses default, skip, delay or fail to pay debts or money borrowed. Financial risks are avoidable, and one method of avoiding them is to avoid borrowing money. An example of a financial risk is the failure of a farmer to pay for tax and ensuring that the business complies.

Approaches to Managing risks

In order to manage, minimize, limit and eliminate risks, organization’s need to adopt approaches in risk management to reduce risk impacts, losses as well as effects on the business. The approaches in risk management used in agribusiness is as follows:

Risk avoidance

Risk avoidance is an approach in risk management whereby business organizations within the agribusiness sector use, to eliminate and avoid risks by not doing anything that would result as well as contribute to possible or probable risks. In this approach organizations hesitate to participate, perform, engage, adopt nor get involved in any business practices, operations, activities and mode of action that would lead to risk outcomes. Business in this regard would rather opt to look for solutions that have no possibilities or associations with potential risks that may affect the business. Most businesses avoid risks directly by directly not opting for operations which may lead to risk thus which automatically eliminates the risk as there is no cause for it to exist. Risk avoidance uses avoiding as a method of mitigating and eliminating risk. This approach can be achieved through the policies, procedures, programs, training and introduction of technology all deemed to eliminate possible threats posed to the business. In most cases risk avoidance does not participate in any business action or operation that can result in possible risk. Risk avoidance is effective in small risks that can be avoided, therefore there are risks that cannot be avoided, otherwise the business will collapse to the ground. For example, in agriculture farmers follow good agricultural methods to avoid risks that can impact production.

Risk transfer

Risk transfer is an approach in risk management whereby businesses in the agribusiness sector use to transfer, pass, and spread risks by outsourcing them to a third party. In risk transfer the risks are mitigated by transferring risks, occurrences, impact and loss a business can endure to an entity which is willing to take responsibility at a fee. In this regard business in general, purchases to get insurance for a fee from insurance companies to insure against possible probable risks, in exchange for risk responsibilities when they occur. In simple terms its outsourcing and accounting for business risks, responsibilities, impact and losses from insurance companies, should risk occur. This approach involves business organizations and insurance companies which have a contracted agreement with its compliance.

The agreement depends on the type of risk and once the risk is transferred, they are no longer at the responsibility of the business but of the insurance companies. This means that if the company experiences a risk in the context of the agreement, the insurance company will cover the cost of the risk impacts, costs and losses. Risk transfer is not a simple approach because it depends on the access liabilities and compliance to regulations of insurance companies to cover the costs of insurance. The approach is usually used by manufacturers and retailers who insure products from distribution, handling, storing to selling. Risk in this regard can not be avoided, reduced or retained therefore their only approach is to transfer them to a third party to free yourself from risk responsibility. An example of this risk approach is a company that offers crop insurance that insures farmers income, should there be crop failure or profit failure, thus the risk is transferred from the farmer to the insurance.

Risk reduction

Risk reduction is an approach in risk management whereby businesses in agribusiness use to reduce and minimize possibilities, severity, occurrences, impacts and effects of risk. In business some risks are so complicated and big that they cannot be transferred, avoided, eliminated, nor retained, such risks must be minimized to ensure business sustainability. Risk reduction is simply optimally dealing with risk so that the likelihood or possibility of it happening becomes minimal. Risk in this regard is mitigated by balancing positive and negative attributes and comes with the best solution to reduce potential risks that may arise within a business spectrum. Risk can be reduced through prevention and effective control by research and implementing techniques that can at least reduce losses and impacts. Constant research and analysis of the business environment to identify, prioritize, learn, manage as well combat risk to at least reduce Using tools like VAR (value at risk) that identifies potential losses, evaluate market rise by using probability as well as statistics to provide information on risks can be used in this regard. Furthermore, implementation of a viable, realistic, measurable, and attainable risk management plan is vital to reduce risk by planning as well as adjusting towards them. This gives detailed preparation of any potential risk that may arise.

In some cases if the risk results in huge financial losses that results in permanent business closure, the company may be forced to sell its assets as defensive means of reducing such impact of a financial risk. A business can also limit liabilities by transferring business entities to a limited liability cooperation to reduce risk severity, especially on personal assets. In agribusiness farmers reduce risk cost by integration into diversification. The farmers may enter into diversification by combining farm enterprises (tertiary enterprises), planting different commodities in different growing seasons or producing the different cultivars of the same commodity which poses different favorable traits. In this approach the cost of reduction must never over the cost of risk impacts otherwise find other solutions. An example will be to reduce financial risks by ensuring that the farm business meets short-term liabilities in order to continuously sustain business activities and processes or reducing risks by diversifying into other products. Another typical example is seeking professional help from consultants such as Bambooagri.

Retaining risk

Risk Retaining is an approach in risk management in which organizations in agribusiness use to accept risk associated with the business sector and financially prepare for such risk encounters. This is the most common risk management approach used generally by most businesses in the agribusiness sector, especially when the risk cannot be avoided, transferred, reduced or eliminated. This approach mitigates risks by directly dealing with them head on and budget financially for such scenarios that can impact the business. Companies budget and also manage cash reserves in such a way that it prepares for any financial losses or impact by risk. In this regard if the organization experiences risk budgets prepared cover that void of risk impacts and mitigate risk. Management of cash reserves like maintaining credit reserves assists the business in mitigating risk losses by providing the business with the opportunity to obtain loans that can help the business survive until it recovers. Examples in this context is a business always having money just in case things turn for the worse at business operations, just so the business survives a rough patch because honestly speaking, risks will always be there in business.