Johannesburg 1-3/4/09AFRACA/FAO/World Bank1 Risk in Agriculture Ake Olofsson Rural Finance Officer...

Johannesburg 1-3/4/09Johannesburg 1-3/4/09 AFRACA/FAO/World BankAFRACA/FAO/World Bank 11

Risk in AgricultureRisk in Agriculture

Ake OlofssonAke OlofssonRural Finance OfficerRural Finance Officer

Food and Agriculture Organization of the United Food and Agriculture Organization of the United NationsNations

Johannesburg 1-3/4/09Johannesburg 1-3/4/09 AFRACA/FAO/World BankAFRACA/FAO/World Bank 22

Investment in AgricultureInvestment in Agriculture

Investment is the engine of growth. Investment is the engine of growth. Access to financial services can Access to financial services can provide access to the production provide access to the production means required to increase means required to increase agricultural productivity and scale agricultural productivity and scale that lead to higher incomes.that lead to higher incomes.

Johannesburg 1-3/4/09Johannesburg 1-3/4/09 AFRACA/FAO/World BankAFRACA/FAO/World Bank 33

Provision of Financial Provision of Financial ServicesServices

Not necessarily a task for financial Not necessarily a task for financial institutions only. Much of the finance institutions only. Much of the finance in the agricultural production value in the agricultural production value chain is taken care of by other actors chain is taken care of by other actors such as traders, processors and input such as traders, processors and input supply companies. supply companies.

Johannesburg 1-3/4/09Johannesburg 1-3/4/09 AFRACA/FAO/World BankAFRACA/FAO/World Bank 44

Risk ManagementRisk Management

Risk management is about care to Risk management is about care to maintain income and avoid/reduce maintain income and avoid/reduce loss or damage to a property loss or damage to a property resulting from undesirable events. resulting from undesirable events. The key to determining who bears The key to determining who bears risk is finding out who will suffer a risk is finding out who will suffer a loss if something bad happens.loss if something bad happens.

Johannesburg 1-3/4/09Johannesburg 1-3/4/09 AFRACA/FAO/World BankAFRACA/FAO/World Bank 55

Risk in AgricultureRisk in Agriculture Production/YieldProduction/Yield Price/MarketPrice/Market Asset/PropertyAsset/Property InstitutionalInstitutional OperationalOperational FinancialFinancial PersonalPersonal

Johannesburg 1-3/4/09Johannesburg 1-3/4/09 AFRACA/FAO/World BankAFRACA/FAO/World Bank 66

Production/Yield Risk Production/Yield Risk

WeatherWeather Soil qualitySoil quality Pest and diseasePest and disease Planting datePlanting date Plant genetic potentialPlant genetic potential Agricultural practices Agricultural practices

Johannesburg 1-3/4/09Johannesburg 1-3/4/09 AFRACA/FAO/World BankAFRACA/FAO/World Bank 77

Risk Management in Risk Management in AgricultureAgriculture

Policy issues Policy issues On-farm physical measuresOn-farm physical measures Financially-based mechanismsFinancially-based mechanisms Good agricultural practicesGood agricultural practices

Johannesburg 1-3/4/09Johannesburg 1-3/4/09 AFRACA/FAO/World BankAFRACA/FAO/World Bank 88

Reduce or Cope with Risk?Reduce or Cope with Risk?

Risk reduction/mitigationRisk reduction/mitigation Risk copingRisk coping

Risk retentionRisk retention Accumulation of saleable assetsAccumulation of saleable assets SavingsSavings

Risk transferRisk transfer InsurancesInsurances

Johannesburg 1-3/4/09Johannesburg 1-3/4/09 AFRACA/FAO/World BankAFRACA/FAO/World Bank 99

Lending to AgricultureLending to Agriculture

High systemic, market and credit risksHigh systemic, market and credit risks Slow return on rural investmentsSlow return on rural investments Low profitability of small-holder agriculture Low profitability of small-holder agriculture Inability to offer guarantees due to low levels of Inability to offer guarantees due to low levels of

assets assets High cost due to geographical dispersion of clientsHigh cost due to geographical dispersion of clients Poor infrastructure,Poor infrastructure, Insufficient financial management capacity of Insufficient financial management capacity of

farmersfarmers Insufficient knowledge about agriculture Insufficient knowledge about agriculture Unfavourable political interference Unfavourable political interference

Johannesburg 1-3/4/09Johannesburg 1-3/4/09 AFRACA/FAO/World BankAFRACA/FAO/World Bank 1010

Insurance and LendingInsurance and Lending

Reduces credit default risk but, could Reduces credit default risk but, could have a negative impact on banks’ have a negative impact on banks’ lending operations.lending operations.

Johannesburg 1-3/4/09Johannesburg 1-3/4/09 AFRACA/FAO/World BankAFRACA/FAO/World Bank 1111

Way ForwardWay Forward

Promoting better on-farm risk Promoting better on-farm risk reducing and risk coping strategies reducing and risk coping strategies through better extension services through better extension services

Understanding farmer risk attitudesUnderstanding farmer risk attitudes Blending insurance with other Blending insurance with other

financial productsfinancial products

Johannesburg 1-3/4/09Johannesburg 1-3/4/09 AFRACA/FAO/World BankAFRACA/FAO/World Bank 1212

Rural Finance Learning Rural Finance Learning CentreCentre

A website dedicated to providing A website dedicated to providing access to the best materials for access to the best materials for capacity building in the field of rural capacity building in the field of rural finance. finance.

http://www.ruralfinance.org/http://www.ruralfinance.org/