“Disaster management IN SOUTH AFRICA is a disaster,” said Dr Tobias Doyer, head of Santam’s agricultural business unit at the recent Agricultural Market Trend (AMT) agricultural outlook conference. “If you have a system in place that will only give relief to farmers two years after something has gone wrong … that is a disaster.”
With inflation soaring, demand falling due to inflation and input costs rising by 300%, farmers are under immense economic pressure and filled with uncertainty. In addition, South Africa is one of only a few countries in the world that does not have a government input-cost insurance scheme. In his address, Doyer discussed strategies and alternatives to manage risk during the economic downturn and pointed out that identifying risk is the first step to controlling it.
Assessing agricultural risk
Production risk – uncertain natural growth processes of crops and livestock and weather uncertainties.
Price and market risk – uncertainty about commodity prices and input costs.
Legal and environmental risk – uncertainties surrounding government actions.
Financial risk – farmers that borrow money are obligated to repay the debt.
Human resource management risk, which includes the “three Ds” – divorce, death and disability of an owner, manager or employee.
Doyer explained that when identifying risk, it’s important to consider all aspects of the business and the relationships that exist across all operations. Pinpointing the source of the risk, as well as analysing the risk’s nature, is of utmost importance. Thereafter, a management plan needs to be implemented. When managing agribusiness risk there are several options. One can try to avoid or reduce risk by either reducing the severity of the loss or the likelihood of the risk recurring. And in times of high inflation, outsourcing can bring relief to farmers and agribusinesses. The third option is risk retention – accepting the loss when it occurs. This is a viable strategy for insignificant risks where the cost of insuring exceeds the potential loss.
Lastly, the most popular option is to transfer risk. insurance is an effective way of transferring risk to people with vast business knowledge and risk management capabilities. The strategies for risk management. Supply chain visibility and positioning – farmers need to position themselves correctly. The closer they are to the supply chain where contacts are built up, the more stable they will be. They also have to consider that should there be trouble in the market and prices tumble, who it is who will be there to help them at the end of the day.
Branding – brand identity commands a price premium, which creates a perception of quality, and clients relate more to products they recognise. In this way customer loyalty is created. addition, the price of a recognised brand must stay the same during economic difficulty.
Financial structuring – strategically sound financial structures enable agribusinesses to effectively reduce the cost of capital and also boost return on it while considering factors such as growth, risk, and taxation. After a year like this year, with the international economic crisis and the local credit situation, farmers have to take a very close look at their capital and recognise that there’s currently an upward cycle in interest rates. A sound financial structure allows room for adaptation in times of adverse economic conditions.
Efficiency improvement. – making use of available technology will boost profitability and productivity. The important thing is to keep abreast of technology because it is interlinked with productivity, which in turn, ensures sustainability.
Benefits of effective risk management
Boyer says effective risk management enables farmers and agribusiness to minimise the impact of high lending rates and an inflation-induced lack of demand on their enterprises.To sum up, by improving supply chain visibility, establishing a strong brand, and strategically planning a financial structure, agribusinesses and farmers will find themselves in a position to react swiftly to adverse conditions. – Rudi Massyn
