If any manager knows about risks, it’s us farm managers. We deal with the weather, product perishability, markets, the currency, and the physical security of the farm and family. There are no magic formulas to risk management – quite simply, taking the trouble to identify, assess and prepare strategies to address risks makes us more capable and resilient when dealing with them. Louis Pasteur, the French scientist, is credited with saying, “Chance favours the prepared mind.” Never a truer word was spoken.
Once risks have been identified and assessed, the next step is to consider what you can do to eliminate or reduce them. In my early days in business, I thought risk management meant insurance. How wrong I was. Insurance should probably be the last option for consideration. For example, well-designed and regularly rehearsed fire drills, with the right back-up equipment in place, are a far cheaper way to reduce fire risks. These procedures will, in any case, always reduce the cost of insurance. There was always one risk, though, which I battled to get to grips with – foreign exchange or currency risk. If you’re an exporter this is a top risk, and yet again and again I come across farmers who pay scant attention to it.
In January this year you would’ve received around R7 for each US$ you received on the export market. In March it was R7,50 and in early July it’s back to R7. And this was a period where our currency was relatively stable. These huge swings translate into huge risks in anyone’s language.
Your risk, your responsibility
While we all understand the impact of foreign exchange exposure, many of us refrain from actively managing it for ourselves. There are a number of reasons for this: We don’t understand it. We often, wrongly, consider tools like forward exchange contracts, futures and options to be speculative. argue this sort of financial manipulation is outside our field; that we’re farmers, not gamblers on currencies. We often claim that our risk can’t be measured, and this is correct.
Currency exposure is complex and can seldom be gauged with precision. But imprecision should be no excuse for indecision. There are many risks in farming which can’t be measured precisely, but against which we take mitigating steps, so this argument doesn’t hold water. ften, if we’re exporting through an agent, we assume he’s taking care of it for us. Maybe, but you should know precisely what risk management is being provided and how much it costs. F orex risk management is a complex business which needs expert attention, but that’s no reason you shouldn’t know enough about the subject to ask the right questions. Let’s explore the subject in a little more detail next time. Contact agribusiness consultant Peter Hughes on (013) 745 7303 or e-mail [email protected].