Preface - p4arm.org · Web viewThis workbook is the result of PARM recent experience on implementing short capacity development events on Agricultural Risk Management in Uganda,

Platform for Agricultural Risk Management | Managing risks to improve farmers' livelihoods

Platform

for Agricultural

Risk Management


Platform

for Agricultural

Risk Management


Managing risks

at farm level:

a farmers' workbook

Draft documentDRAFT WORKBOOK

9 June 2017CONFIDENTIAL, DO NOT DISSEMINATE

9 June 2017

| Rome

CONFIDENTIAL, DO NOT DISSEMINATE

Acknowledgments

This workbook is the result of PARM recent experience on implementing short capacity development events on Agricultural Risk Management in Uganda, Niger, Senegal, Cabo Verde, Cameroon and Liberia. Its current version has been coordinated by Ilaria Tedesco (PARM). This document has benefited from the inputs of many. In particular, Jan Kerer (PARM consultant), Herbert Talwana (Makerere University), Mariam Sow (NEPAD), Jesús Antón (PARM), Massimo Giovanola (PARM) and tenths of farmers, extension workers and government staff that have participated in the trainings organized by PARM in 2015 and 2016. Aziz Dao (PARM) elaborated the final exercise. Karima Cherif (PARM) and Manuela Zingales (PARM) took care of the editing part.

Table of Contents

Preface5

Chapter 1: Preliminary exercises on understanding risks in smallholder farming6

Chapter 2 Understanding risks in agriculture8

Session 1: What is a risk?8

Session 2: Which are the risks at farm level and their characteristics?11

Session 3: Which are farmers' risk preferences/approaches?14

Session 4: What is agricultural risk management?15

Session 5: What is a holistic approach to risk?16

Session 6: Key points of the Chapter17

Chapter 3 Risk assessment at farm level19

Session 1: What are the basic elements to assess risks?19

Session 2: Information needs and types20

Session 3: How to measure risks and impacts22

Session 4: Prioritization of the risks23

Session 5. Prepare your own risk assessment26


Chapter 4 Identification of risk management tools28

Session 1: How to deal with risks28

Session 2: Risk mitigation29

Session 3. Risk transfer32

Session 4: Risk coping35


Chapter 5: ARM Strategy and Monitoring37

Session 1: ARM strategy37

Session 2: Tools monitoring activities40


Chapter 6: Comprehensive exercise43

Chapter 7: Solutions of the exercises50

References58

Preface

This workbook is designed to provide farmers with basic knowledge on agricultural risk management (ARM). Agricultural activities are characterized by uncertainty on weather, prices, disease outbreaks and other unpredictable hazards that often impair farming activities and the livelihoods of many. Managing risks means thinking systematically about the risks and being prepared in advance, reducing exposure and mitigating the negative consequences of unpredictable hazards that affect farming activities.

Farmers know about the risks affecting their farming activities. This workbook provides the basic framework to improve this knowledge and to make the best use of information to assess and manage these risks. This includes the possibility to gather more information, better knowledge, and professional help to manage agricultural risks. Only taking informed decisions, farmers can manage their farming activities under uncertainty, and can profit from different opportunities that may come because they are empowered to manage the corresponding risks.

Chapter 1: Preliminary exercises on understanding risks in smallholder farming

This Chapter is a preparatory activity to the agricultural risk management course presented in the workbook. The aim is to reflect upon farming activities, risk sources and related consequences through the completion of the following tasks before introducing agricultural risk management concepts. After the training, the tasks can be reviewed to understand what has been learned and what can be put in practice to improve farming business under uncertain conditions.

Task 1: Introduction to definition of risks

1. Can you differentiate between an agricultural risk and an agricultural constraint?

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2. What comes into your mind of when you hear about agricultural risk management?

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3. Which are the unexpected events/factors that expose your farming activity to unstable revenues or uncertain crop or livestock production?

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Task 2: Introduction to risk assessment

4. How frequent are the previously identified unexpected events (e.g. rare, moderately frequent, very frequent)?

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5. Which are the losses caused by the previously identified unexpected events/factors to your agricultural activity? And to your family wellbeing? How would you rate the losses related to these events/factors (e.g. low, moderate, high)?

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Task 3: Introduction to agricultural risk management tools

6. Which are the solutions/remedies you put in place to reduce the negative consequences or the occurrence of these events/factors? Are the solutions/remedies effective for your farm activities?

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7. Which solutions/remedies you would like to use to reduce the negative consequences or the occurrence of these events/factors but you don’t have access to? Why?

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Task 4: Introduction to agricultural risk management strategy and monitoring

8. Which are the actions you take to control the effectiveness of the solutions/remedies you use to reduce the negative consequences or the occurrence of previously identified events/factors?

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9. What is your expectation of this training and what you hope to learn?

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Chapter 2: Understanding risks in agriculture

Agricultural activities are risky. Uncertainties about weather, prices, national policies, and international markets can negatively affect farm operations and related farmers' decisions leading to uncontrolled consequences affecting both farm business performance and household's livelihood. Dealing with risks means including them into farm business management practices.

In this chapter, we are going to discuss:

1.

2.

2.1. What is a risk?

2.2. Which are the risk at farm level and their characteristics?

2.3. Which are the farmers' risk preferences/approaches?

2.4. What is agricultural risk management?

2.5. What is a holistic approach to risk?

Session 1: What is a risk?

1. Definition

A risk is an UNCERTAIN EVENT, result of natural hazards or man-made activities that leads to physical or monetary LOSSES.

Agricultural risks affect farming activities and farmers’ livelihoods.

2. Explanation, rational

A risk affecting agriculture is the possibility that an undesirable happening has adverse effects on both individual farmers and overall performance of the agricultural sector.

Reduction of the negative consequences of risks is possible and desirable. Farmers’ development plan should take into account how to handle agricultural risks.

3. Key words:

a. Probability: the likelihood of experiencing natural or man-made event/hazard in a geographical place and in a particular future point of time

Examples of likelihood of a risk:

· Low probability (very rare) event, i.e. earthquake

· High probability (frequent) event, i.e. minor pests

b. Elements at risk: what is affected by the hazard. Examples of the elements at risks:

· harvesting

· human and animal health

· farm income

c. Severity - Type of losses: expected losses from a hazard such as:

· physical damages

· economic losses

· livestock losses

· deaths

The impacts of risks can be quantified. Quantification of the negative consequences of risk is an essential aspect of preparedness and mitigation planning in agricultural risk management. The calculation of the negative consequences of risks can be done in physical or monetary terms. Monetary values are widely used to allow comparability among risks' impact.

d. Cause-effect mechanism that links all the elements

Figure 1 describes the risk as a shock or unexpected event (in contrasting with expected events) that affects specific elements of the agricultural sector in a geographical area in a certain point of time. Impact may differ based on different risks, elements at risks and geographical areas.

Figure 1: Description of a risk

For example, Figure 2 visualizes the impact of weather risks and disasters on food security as element at risk. During the years characterized by droughts and/or floods, the number of population affected by food insecurity increased.

Figure 2: Cause-effect mechanism in Mozambique: risk and food insecurity

Source: SETSAN reports and World Bank (2015)

4. Example

A drought in Sunnyland has negatively affected the availability of water for irrigation for fruits and vegetables, bringing down the yields during the harvesting season by 50%.

5. Characteristics of the risk

Knowing some characteristics of the risks can help farmers manage better farming activities under uncertainty.

a. Distinction of the risk from the following:

· certainty

· trend and cycle

· constraint

Certain events, trends, cyclical events and constraints can have negative consequences as well but they are different from risks because it is known that they are going to happen, when and why. Therefore the farmers are prepared to those ones.

Constraints are defined as conditions or impediments that lead to suboptimal performance; trends are instead longer-term changes on “chronic” patterns (reversible or irreversible) while a cycle is a repeating set of events or actions that happen again and again in the same order. All can bring negative consequences but they are different from risks.

Examples of non-risks: If farmers don’t treat the pests on your trees, the quantity and quality of fruits will be negatively affected. Recurrent droughts are not considered a risk because farmers expect them and can avoid their negative effect in advance, for example through building-up an irrigation system. If farmers keep using over-recycling due to lack of resources, they lead eventually to lower yields.

b. Distinction between symptom and cause

· Symptoms are the direct or indirect results of a risk

· Causes are the ways the occurrence manifests its negative effects

Example of symptom and cause: The erratic rainfall during the rainy season resulted in lower maize yields with respect to last year.

c. Distinction between direct and indirect risk

· Direct risk affects farming activity in a straightforward way and farmers have some degree of control over it

· Indirect risk affects farming activity as a consequence of direct risks and not always the farmers can have some controls over it

Example of direct and indirect risk: The heavy rainfall resulted in a partial loss of the harvest; the rest of the harvest fetched a lower price due to rotting. Farmers in fact delayed to arrive to markets due to disruption of the road caused by the rainfall.

d. Distinction between independent and interlinked risks;

· Independent risks are isolated risks that do not lead to or are not caused by any other risks or strictly related consequences

· Interlinked risks refer to the simultaneous or sequential occurrence of different risks leading to cumulated losses

Between two extremes lie a variety of risks that are moderately linked.

Example of independent and interlinked risk: Tom injured himself trimming the trees and cannot work on his field for few weeks. The outbreak of cassava brown streak and the following lower quality of the roots will affect negatively Tom’s revenues.

e. Distinction between individual and systemic risks:

· Individual risk is associated with single entity, e.g. single farmer

· Systemic risk is associated with an entire market or geographical area

Example of individual and systemic risk: A hailstorm destroyed Tom's maize field. The earthquake caused 300 victims in the northern area of Sunnyland.

f. Distinction between frequency/probability and severity of a risk:

· Frequency/probability refers to how often the event/hazard occurs

· Severity refers to the size of losses associated with the occurrence of the event/hazard

Example of frequency and severity: In the last two decades four hurricanes hit Sunnyland, i.e. with an average one hurricane every five years. The hurricane causes about 1 million shelling of damage on the coastal area of Sunnyland.

GROUP DISCUSSION (to be facilitated by the trainer) #1

Reply and discuss in group to the following questions:

•Which are the agricultural risks most likely to happen your area?

•Which are the categories (farmers, crops, etc.) most exposed to agricultural risks in your area during the past?

•Could you estimate the losses of one negative event happened in the past in your area?

EXERCISE #1

Reply to the following questions

It is end of March. The peak of rains is expected to occur around mid-April and you did not prepare yet a proper drainage system for your plot. Is it a risk? Why?

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An unexpected flood hit your geographical area. What can be the negative consequences on your plot? An on the entire area?

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There is an outbreak of Foot and Mouth disease in West Districts of Sunnyland. Is it an individual or systemic risk?

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Session 2: Which are the risks at farm level and their characteristics?

Risks faced by farmers are numerous and varied, and are specific to the country, climate, and farming systems. Their impacts on single farmer or entire geographical area can be measured.

1. Definition

The MAIN SOURCES of risk can be divided in main five areas and related sub-categories. They are:

1. PRODUCTION RISKS

· Weather-related risks

· Natural disasters

· Biological and environmental risks

2. MARKETING RISKS

· Market-related risks

· Management and operational risks

·

3. FINANCIAL RISKS

· Financial risks

4. INSTITUTIONAL RISKS

· Policy and political risks

· Infrastructural risks

5. HUMAN RISKS

· Labour and health risks

Factors leading to each specific risks and related examples are summarize in Table 1.


Production risks are all the hazards that can compromise crop and livestock performance throughout all the activities involved (i.e. planting, growing, harvesting, etc.). When engaged in farming activities, farmers invest own resources (time and money) to get an expected outcome from harvesting and breeding. The farming output has to cover production costs, pay for households needs, give resources for next season and provide eventually some extra-profits. However, uncertainty can hamper farming activities: realized outcomes can be lower than expected and farmers' resources can get partially or totally lost. For example, a drought can lead low yields; a disease outbreak can cause the death of cattle and have negative consequences on dairy production.

Marketing risks are related to unpredictable changes of prices and costs beyond the control of single farmer, and they are different from seasonal or cyclical variations that can be instead expected at a certain point of time. Prices and costs are affected by supply and demand of an agricultural commodity, e.g. when supply is lower and/or demand is higher than expected commodity price often rises, and by the cost of production as effect of other costs variation (i.e. input, labour, etc.). Marketing risks are often interlinked with other risks, i.e. a drought can cause lower yields, and therefore a lower supply for a certain commodity, translating into higher price at market level.

Financial risks are linked to credit access to run farm business, and can be caused by uncertainty on interest rates, willingness of the lender to continue provide credit, farmers' ability to pay back. Causes can be locally identified or be linked to international markets. For example, borrowing money at a high interest rate can be risky for debt repayment for a smallholder.

Institutional risks occur when unexpected changes interrupt or negatively impact national/local service provision, government policy or hard infrastructures affecting farming activities. For example, a sudden withdraws of input subsidies, new regulation on quality standards for export, and disruption of power may force farmers to experience income losses and rethink their business model.

Human risks may affect farming business. Personal circumstances such as migration, illness or death of a household member may hamper farming business in many ways, for example causing labour shortage in the field, forcing farmers to sell assets to pay medical bills, having less non-farm income.

Table 1 reports all the risk categories, their causes and single risks.

Table 1: Main risks faced by farmers

Risk

Factors

Examples

Weather risks

Rainfall variability (i.e. deficit or excess)

Temperature variability

hail storms

strong winds

floods

droughts

hurricanes

typhoons

wildfire

Natural disasters

Extreme events

earthquakes

volcano activities

wildfire

landslides

Biological and environmental risks

Outbreak

Poor sanitation on water

Poor safety and quality control on food

crop pests

livestock diseases

contamination

Market-related risks

Change in supply/demand of inputs/outputs

Price variability of inputs/outputs

International market instability

Production variability

Time delays

Change in production standards and trade tariff

Price volatility

Market supply and demand volatility

Management and operational risks

Lack or inadequacy of information and knowledge

Poor management of farming practices and decisions;

Inability to adapt to changes;

Breakdowns of equipment

Financial risks

Uncertainty in financial markets

International market instability

Lender's willingness to provide funds

Increasing interest rates

Difficulty in debt repayment

Unavailability of credit

Policy and political risks

National and local institutional instability

Policy changes affecting the value chain

Political upheavals

Riots

Regulatory changes

Malfunction of markets access

Infrastructural risks

Absence/ malfunctioning of infrastructures

Difficulties in access to service provision for transport, energy, communication networks, etc.

Physical disruption of infrastructures

Regulatory changes

Labour and health risk

Changes in the household and farming workforce setting and workability

Illness

Injuries

Divorce

death

Sources; World Bank (2011); author's elaboration

3. Example

At the end of harvesting season, farmer Tom realized that both quantity and quality of maize sold is lower than what expected. Why could this have happened? Figure 3 looks at the different stages of the farming activities to understand which risks could have affected farmer Tom.

Figure 3: Example of risks at different farming activities level

Here follow few other examples of risks as reported from Uganda Risk Assessment (PARM, 2016):

· weather risks: erratic and shifting weather patterns pose a serious risk to the coffee production in Uganda.

· crop pests and disease: matoke production is under threat of pests and disease. Black leaf streak infestation results in significant reductions in leaf area through premature drying of leaves and yield loss for banana. Early leaf drying results in incomplete filling of banana fingers

· policy and political risks: failing to meeting EU rules and standards on trade of Nile perch will create a sever loss in the Ugandan fishery sector

· health risk: serious illness/accident of income earner is reported by 10% households in central Uganda causing 8% of them changing their eating patterns.

COUNTRY CASE STUDY #1 – Relevant country risks

To be elaborated by local trainer.



· Now that you know all the possible risks for the agricultural sector, revise –if needed- the risks identified in the previous Group Discussion (p.9) as most likely agricultural risks in your area.

· Which is the risk that you fear most and less on your plot?

· Which are the effects of the most feared risk on you plot and for your family?

Session 3: Which are farmers' risk preferences/approaches?

How relevant is a risk at farm level may depend on several factors, including the farmer's characteristics and attitude towards risks. Setting up farming activities prone to more risks often implies better and more remunerative farming opportunity and this is why farmers nee to deal with risks.

1. Definition

Farmers differ in the degree to which they are willing to accept risks. Often, more risks mean better returns from farming. Their attitude can classify farmers as:

· risk-taker, open-to-risk individual that prefers options that can bring more gains rather than adopting a protective behaviour

· risk-averse, more cautious individual that are less incline to action that brings more uncertain consequence

· risk neutral, with a position that lie in between risk-taker and risk-averse


Many are the farmer's characteristics influencing the way agricultural risks are perceived and dealt with. In particular, they are:

· household characteristics, e.g. number of household members, jobs of the household members, etc.

· farm size/assets value, e.g. number of hectares, possession of equipment, etc.

· presence of other income sources, e.g. rents, savings, etc.

· production system, e.g. subsistance, commercial, etc.

· local context, e.g. job opportunities in the geographical area, climate, etc.

· past experience, e.g. having already dealt with risks, past shocks, etc.

3. Example

Having a large family to feed and not being able to find work opportunity outside farming are two characteristics that may lead to accept less risk than others. On the contrary, having successfully profit from past events may lead to a risk taking attitude.

EXERCISE #2

Farmer Tom needs to decide how many different crops to plant. He is not sure if planting only maize that fetched a very high price last year but it is prone to pest infestation or intercropping maize with bean so that if one fails, he may count on the other one.

How would you describe in term of risk attitudes these two possibilities?

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Session 4: What is agricultural risk management?

In dealing with risks, farmers often need to take decisions which outcomes are not fully predictable. More numerous and complex are the risks, more difficult is to take the best decision. Farmers need to find the best way to deal with agricultural risks to protect farming business and household members.

1. Definition

Agricultural Risk Management (ARM) is the process that attains dealing with risks. It requires anticipating potential problems and planning solutions in advance to limit negative consequences. Assessing the risks, taking decisions on risk management tools to put in place, and monitor and evaluation effectiveness of tools and strategy in place are key elements of ARM.


Once aware of risks for their activities, farmers have to develop a range of methods for managing risks, which macro categories are:

· Ex-ante measures (before the negative consequences of the risks emerge): crop diversification, share-cropping etc.

· Ex-post measures (after the negative consequences of the risks emerge): credit, temporary employment, savings, etc.

Risk management should be planned on ex-ante basis, i.e. before the realization of an event. Some ex-ante plans provides for actions on an ex-post basis. Managing risks at ex-post basis is considered less risk management, as when something happened is not anymore a risk but already a certain event.

Decisions on ARM need to be planned considering the possibility of more than one outcome. Effective decisions need information and often external expertise as critical elements. When the risks are low and the consequences small, taking decisions is a relatively easy process. Complex risks may instead need more careful considerations and thoughtful processes.

Planning to minimize negative consequences of a risk can entail a cost. Therefore, farmers need to carefully evaluate options that are more suitable, being also careful that the costs of the risk management tool would not be higher than the negative consequences of the manifested risks.

The tool(s) chosen need to be implemented and evaluated to see if it has been successful or not. This helps the farmers to build on-farm information and to reshape the (next) decision process.

Figure 4 reports the essential element of a decision-making process for agricultural risk management in cyclical five steps. Step 1: Risks are present and need to be identified; Step 2: Risk assessment need to be carried out at farm level to decide which risks to prioritize; Step 3: After the prioritization, there is the need to select most appropriate tool(s) to deal with risks. Step 4: Implementation of a risk management tools requires a cost at farm level, not only monetary terms but also in terms of cost-opportunity of other alternatives not chosen. Step 5: Farmers have to monitor the effectiveness of the risk management tool(s) in place, whether risks occurred or not. This last phase helps to set up the next assessment of farm risks.

Figure 4: Agricultural risk management cycle

Which are the risks at farm level (Step 1) has been explained in Chapter 2, Session 2. Risks assessment (Step 2) is the object of Chapter 3 while the tools and their implementation (Step 3 and 4) are illustrated in Chapter 4. Results monitoring (Step 5) are handled in Chapter 5.

Session 5: What is a holistic approach to risk?

1. Definition

A holistic approach to agricultural risks implies that no risk is considered in isolation. All the elements and interactions of risks, including strategy and policy, are taken into account and the role of all the stakeholders involved identified.


Risk affects both farmers and the overall performance of the agricultural sector. The approach is called holistic because:

· the focus is not on a single farm activity, but try on the whole farm or farm-household system

· the focus is not on a single isolated risk, but encompass all the interlinked risks at stake

· the focus is not on a single tools , but on the whole set of tools available to deal with risks

Many are the stakeholders involved in different way in agricultural risk management practices. They can be grouped in three categories or level:

· Micro level: Farmers and small business

· Intermediate level: Farmers' organization, NGOs, input suppliers, financial service providers

· Macro level: Government, International Organization

Figure 5 and Figure 6 summarize the interchange between farmers/farmers organization with the entire risk environment and how the farmers' risks are involved in a broader system. Agriculture development can be successful only if the presence of agricultural risk is fully acknowledged embedded in a comprehensive development plan.

Figure 5: Farming risk environment

FARMERS

NATURE

MARKETS

CULTURE

POLITICS

FARMER ORGANIZATION

The approach to agricultural risk management needs to be holistic because:

a. risk management system of smallholders is complex and many elements of risks and farm business are interrelated

b. there is need of all information and capacities available to assess risks

c. a risk management system requires different layers of responsibility

d. different types of risk and different options to manage frequency, severity and linkages have to be taken into account to have a comprehensive farmers' business development strategy.

Figure 6: Risk Management as a system

Moreover several are the linkages/relationships between farmers and farmers' organisations within:

1. Economic and productions system

2. Social and cultural relationships

3. Natural environment;

4. Political and institutional settings.

Session 6: Key points of the Chapter

Farming activities often have uncertain outcomes. Dealing with risks means including them into farm business management practices.

Dealing with risk can also imply having better farming income opportunities. When risks increase, it gets more difficult to take decisions, and Agricultural Risk Management (ARM) techniques are more needed.

Agricultural Risk Management (ARM) is the process that attains dealing with risks. It requires anticipating potential problems and planning solutions in advance to limit their negative consequences at farm level. Assessing the risks, taking decisions on risk management tools to put in place, and monitor effectiveness of tools and strategy in place are key elements of ARM.

Chapter 3: Risk assessment at farm level

Once recognized the potential risks that can affect farming activities, farmers need to assess the possible consequences or impacts of risks on their outcome, i.e. crop and livestock production and income. This task implies knowing how likely a risk would occur and which impact and costs are associated with identified risk(s) on their farm production or income.


1.

2.

3.

3.1. What are the basic elements to assess risks?

3.2. Which types of information are needed

3.3. How to measure risks and impacts

3.4. Prioritization of the risks

3.5. Prepare own risk assessment

3.6. Key points of the Chapter

Session 1: What are the basic elements to assess risks?

As Ch. 2 Session 1 explains, a risk can be assessed determining its frequency and its severity.

1. Definition

The FREQUENCY (or probability) of a risk refers to how often an event or a hazard occurs while the SEVERITY is related with the size of losses associated with the occurrence of event or hazard. Both the average severity of a risk and the maximum severity are relevant to assess risks.

2. Explanation/rational

It is important to know how often farmers are likely to be affected by risks and how big their consequences are at farm level. Frequency refers to how often a risk can happen, bearing in mind that is not giving any certainty about when a risk is going to happen but only an idea about when it might happen. Severity attains to consequences that can be calculated as average and/or worst-case impacts of risks. However, evaluating frequency and severity is not an easy task. Sometimes farmers need external help to understand how the agricultural risks may affect their business.

To assess agricultural risks farmers have to reply to three questions:

1. How often does the risk happen during a certain time? The answer determines frequency.

2. What are the average consequences that can happen in terms of loss of production or income? The answer determines average severity to be expected.

3. What are the worst consequences that can happen in terms of loss of production or income, i.e. the worst- case scenario? The answer determines the highest severity to be expected.

As discussed, the direct (and indirect) consequences of a risk can be measured in terms of income, production, livestock and human losses. They cannot be limited only to the moment of the occurrence. Often, hazards manifest their negative consequences also in the future, i.e. during next harvesting seasons or following years.

Possible problems farmers may encounter to determine frequency and severity:

· It is not always easy to identify root cause of problems, risks and their overall effects;

· Risks are often interlinked and it may be difficult to disentangle specific consequences of single risks;

· Long term impacts and costs are often difficult to estimate;

· Difference between 'normal situation' and 'situation after risk' at farm level is often unclear, as often farming activities are affected by unknown risks

If agricultural risks catch farmers unexpectedly (without any tools or strategy in place), possible responses to risk occurrence at farm and household level are:

· Sell livestock

· Sell land and/or home

· Reduce expenditures

· Search for other jobs

· Send children to work

· Borrow money

· Borrow food

· Reduce food intake

· Beg

· Migrate

To avoid disruption of farming activities and the deterioration of livelihood, it is important to manage the risks ex-ante, i.e. anticipating potential consequences of identifies agricultural risks and planning solutions in advance to limit negative impacts on farming activities.

3. Examples

A hailstorm in Sunnyland has destroyed part of maize harvesting causing production and income losses to commercial farmers, hampering their availability to afford inputs for the next crop season. This could therefore translate into lower yields at next harvesting time. For subsistence farmers, hailstorm means losing part of their harvesting and reducing household food consumption, forcing farmers to sell valuable assets such as livestock, agricultural equipment, etc. to provide food for the household members. If they wold not sell assets, health risks due to malnutrition for household members may result from no actions.

EXERCISE #1

Farmer Tom grows half hectare of land with maize. In a good year he can harvest 1,000 kg of maize. Low quality pesticides, however, caused maize attacked by minor pests once a year. During the last 10 years (2005-2014) he lost about10% of its harvesting on a yearly basis.

Farmer Emma uses instead good quality pesticides in his half hectare of land but in 2014 the whole area suffered a severe drought. The first drought occurred in 2005, followed by one in 2009 and the current one of 2014. Droughts did not bring enough water for maize to grow at the expected level (1,000 kg) and Ben lost 40% of the yields every time it occurred.

What are the frequency of the risks Tom and Emma are facing? What is the crop losses farmer Tom and farmer Emma? Which risks would you consider more difficult to handle? Discuss the exercise.

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· What is the most and the less severe risk in your area?

· What is the most and the less frequent risk in your area?

· What can be your possible responses/reactions to a very severe risk if not managed in advanced?

· What can be your possible responses/reactions to a very frequent risk if not managed in advanced?

Session 2: Information needs and types

1. Definition

To assess and plan actions to manage risks, farmers need to be informed. Information is a key component to run successfully any farming activities. It is critical for planting crops, to avoid post-harvest losses, to know when to fetch the highest price in the market. Information has to be considered an input, as important as physical inputs such as seeds and fertilizers to make farming activities profitable.

Sometimes even the access to most updated or sophisticated information may not be sufficient: most of the risk frequency and severity may remain only rough projections until the risks are realized. The severity of the risk can also be difficult to measure even after the risk manifests itself. As said before, access to more elaborated information can be facilitated by external help.

Information is related to:

· Production (i.e. yields)

· Weather and climate (i.e. rainfall, temperature)

· Input (i.e. seed, fertilizers)

· Prices (i.e. of crops in different markets and of inputs)

· Pest and disease (i.e. outbreaks)

· Access to credit (i.e. current interest rate for lending money)


Information may be more or less accurate, more or less accessible, and more or less costly depending on different risks, sources and farmers’ characteristics.

Good agricultural risk management practices need accurate and accessible information to farmers, with costs that should be lower than the costs of the actions to reduce negative impacts of risks and/or the consequences of the risks itself.

Information can be generated from farming activity or can be obtained from other sources other than farm. In particular:

On farm information are gathered at own farm level. A good practice is keeping records of production and prices for crop and livestock at farm level in different times of the year. The amount of information collected - also through the years - may allow farmers to produce own yearly/seasonal data useful to evaluate frequency and severity. Moreover, information is needed to:

· understand details of farm business performance

· track variations of yields, crop selling price, inputs buying prices and quantities

· review past decisions and related outcomes.

With these insights, the farmers may increase their awareness about past and current risks, and may plan better decisions to manage future risks. However, on farm information may not be sufficient for managing agricultural risk at farm level. They often need extra support from off-farm information.

Off-farm information includes various types and sources of information, and external help. They can be qualitative, e.g. information on new trade and quality regulations, or quantitative such as price data in the urban markets. Off-farm information can substitute and/or complement on-farm information to help farmers elaborate agricultural management practices in line with individual needs.

Off-farm information can be provided by several sources such:

· Neighbour farmers

· Farmer’s organizations

· Other agents of the value chain (middlemen, processors, wholesalers, input or service providers)

· Extension service

· Government newsletters

· Newspapers

· Radio

· SMS or other mobile phone applications

· National and international statistics

· Law and regulations.

Farmers can access some off-farm information by themselves or being assisted by extension workers or other agricultural services.

However, on-farm and off-farm information to assess agricultural risks can have some limitations such as:

· information is often not presented in the form of indicators of frequency and severity of events

· Translating data/numbers into usable information can be difficult

· Time series data are not easily available

· Household/farm level data are not always collected or available

· There is few integration between different information systems

· Information may not be disseminated on time or when needed

· Information access may be difficult and expensive to access for key stakeholders (especially farmers)

· Information access can be asymmetric between different stakeholders, leading to unbalance bargaining power and relationship

3. Examples

Keeping on farm records for few years, Tom may notice a drop of yields during the current season with respect to past years, and may start to enquire the causes of it. Or a farmer may realize that the pesticides used in the past have not been effective in protecting crops from pests and may decide for alternatives methods.

In case of off-farm information, some type of information such as weather related data, prices, statistics of the geographical areas, have to be mediated by Government and/or local authority to improve their communicability to convey actual risks. For example, climate related information taken by satellites has to be translated: is there the possibility to have a drought during next harvesting season? The same applies to international prices and their consequences for the internal markets: if international prices will lower, the price of my crop will follow?

COUNTRY CASE STUDY #1

To be elaborated by local trainer.

Compile the main sources of information for the following information categories:

PRODUCTION

Sources: ____________________________________________________________________________

WEATHER and CLIMATE

Sources: ____________________________________________________________________________

INPUT

Sources: ____________________________________________________________________________

PRICES

Sources: ____________________________________________________________________________

PEST and DISEASE

Source: _____________________________________________________________________________

CREDIT

Source: _____________________________________________________________________________



· What type of information do you receive? How often? From whom? Through what means? Do you pay for them? How do you use this information?

· What information would you like to receive? Are you willing to pay for that? How much? How this information may changes your farming practices?

Session 3: How to measure risks and impacts

1. Definition

Risk impact is the (negative) consequence of a risk event when it is realized. It is difficult to predict precisely the impacts of agricultural risks, as most of them may have several consequences in the short and long run, depending on event in time and space. Many risks are also correlated among each other.

The impact of risks is measured (or quantified) in quantity and/or monetary terms as losses due to the negative occurrence. Monetary terms are mostly used for comparability and convenience.


Risks have traceable impacts, although their intensity can be unique to each farmer’s situation. As stated before, the size of losses associated with the occurrence of event or hazard are often difficult to evaluate. It is not always possible to exactly determine the cost of each risk due to:

· lack of data/information

· presence of interlinked risks

· constraints of different nature (i.e. financial, physical)

· long term consequences difficult to predict.

Table 2 reports the major impacts associated with each risk. The quantification of each impact has to be done case by case. Physical quantities can be translated in monetary terms to ease comparisons among impacts for different risks and at different time. It is advisable to consider and estimate not only the average impact, but also the worst-case scenario, i.e. the highest severity expected for preparedness to risks.

Table 2: Impacts of each type of risk at farm level

Risk

Impacts

Weather risks

· Lower yields

· Income and assets losses

· Livestock losses

· Human life losses

Natural disasters

· Physical losses

· Livestock losses

· Human life losses

Biological and environmental risks

· Lower yields

· Income losses

· Livestock losses

Management and operational risks

· Lower yields;

· Assets losses

· Income losses;

· Increased farming costs;

Market-related risks

· Income losses

· Savings and investment losses

· Assets losses

Financial risks

· Savings and investment losses

· Missing investments

· Assets losses

Policy and political risks

· Income losses

· Transaction malfunctioning

· Increased farming costs

· Increased taxes and regulations

· Life losses

Infrastructural risks

· Income losses

· Increased costs

· Increased taxes and regulations

Labour and health risk

· Lower yields

· Assets losses

· Income losses

· Increased farming costs

3. Examples

Few ex-ante questions farmers can ask themselves to improve information at farm level and translate it into frequency and severity risk components, to finally measure risk’s impacts. For example:

Question 1: What is normal/expected yield from my crop and my land?

Answer: Keep track of average yields, Ask neighbour farmers about their yields, Ask extension workers to tell what national statistics say and which the yields of research stations are

Question 2: If my seed does not germinate, is it because of low quality, fake seeds, weather factors, wrong management?

Answer: Ask input providers, Ask extension workers to advice on how to minimize and estimate production losses, Ask neighbour farmers about the germination time of their seeds

Question 3: How can I know if it is going to be a drought this year? Will I lose all my harvest?

Answer: Ask extension workers to advice on how to minimize and estimate production losses, Listen to radio and read newspaper, Ask farmers’ organization to help you identifying how you are going to be affected.

Question 4: Why the price dropped so much in the market where I used to sell my crop? Will I be able to recover some losses?

Answer: Consult price bulletin/listen to radio to understand if you can fetch a higher price in another market; Ask extension workers to advice on how to minimize losses or access other markets, Ask farmers’ organization to organize collective action.

Session 4: Prioritization of the risks

1. Definition

Uncertainty is one of the main characteristics of risk. The uncertainty relates to WHEN something will happen (frequency) and HOW severe the impact will be (severity) (see Ch.2 Session 1).

Financial resources or efforts often cannot address all the risks at the same time. Therefore, it is needed to set priority on which risks to handle first to damage at least possible farming activities.


A risk matrix like the one of Fig. 7 can help prioritize different risks faced by farmers and decide which measure put in place first to manage them. Ranking is done considering and severity of a risk frequency, i.e. replying to the questions " how many time a risk can happen during a certain period, i.e. one year?" and "what are the average and the worst consequences in monetary terms of a risk?".

Both severity and frequency are identified by five different degrees of intensity, from very low to very high. Most of the risks have high probability to occur but low severity in terms of impact. For example, the use of low quality seed may lead to lower yield, the frequency of this occurrence is high and consequences relatively contained in terms of production losses. On the contrary, an earthquake has low frequency but high severity impacts, with losses of lives and assets.

Figure 7: Risk Prioritization Matrix

The very high priority cells (dark red) identify risks that have both high/very high frequency and high/very high severity; the red cells (high priority) includes risks with high/medium frequency and high/medium severity, very high severity and medium/low frequency and very high frequency and medium severity. The dark red and red cells identify high level risks. The yellow cells include instead risks with low/very low frequency and medium to very high severity and low/medium severity and medium to very high frequency; these risks are considered medium level risks. Finally, green cells identify very low severity risks and low/very low frequency and very low to medium severity risks: here the risks are classified as low level risks.

TOOL: How to use the Risk Prioritization Matrix

1. List all the risks that can potentially harm farming activities;

2. Rank each risks by severity from very low to very high, assigning if needed a value or a range of values for each degree;

3. Rank each risk by frequency from very low to very high, assigning if needed a value or a range of values for each degree;

4. Fill the matrix with the risks based on the combination severity/frequency;

5. Prioritize and manage actions to risks starting from the risks that fall into dark-red cells to green cells

3. Examples

Table 3 shows how different risks can be ranked with different levels of warning depending on the sector. For example price risks appear to rank first for crops and fisheries but not for livestock. Droughts' impacts are higher than floods' ones. Political risks are instead less important for agricultural sector. The red cells identify the high level risks; the yellow cells are the medium level risks while the green ones contain the low level risks.

Table 3: Example of Risk Prioritization Matrix for different sectors in Uganda

Risk Category

Risk

Food crops

Cash crops

Livestock

Fisheries

Input risk

Low quality inputs

High

High

Medium

Low

Weather risk

Droughts

High

High

High

Low

Floods

Medium

Medium

Low

Low

Hailstorms

Medium

Medium

Low

Low

Thunderstorms

Medium

Medium

Low

Low

All other natural risks

Low

Low

Low

Low

Biological risk

Crop pest & diseases

High

High

Low

Livestock pest & diseases

Low

Low

High

Low

Infrastructure risk

Post-harvest revenue loss

High

Medium

Low

Low

Price risk

Price risk food & cash crops

High

High

Medium

High

Political risk

Northern Uganda insurgency

Low

Low

Low

Low

Karamoja cattle raids

Low

Low

Medium

Low

Source: RAS Uganda

EXERCISE #2

Considering the Tool How to use the Risk Prioritization Matrix, look at the following Table that reports the frequency and severity of the agricultural risks in Sunnyland (in the local currency SLS) and compile the Risk Prioritization Matrix. For frequency, calculate how many times each risk is likely to occur in one year.

Frequency and severity of the agricultural risks in Sunnyland

Risk

Frequency

Severity

Pests and disease

Annual

100,000

Input

Every two years

10,000

Drought

Every 10 years

350,000

Price

Every 3 years

75,000

Post-Harvest

Every 3 months

15,000

Risk Prioritization Matrix for Sunnyland

Session 5. Prepare your own risk assessment

Few easy steps can help initiate the process of risk assessment

1. Draw a map/structure of your agricultural sector, value chain, etc. Sometimes it can help to draw it in chronological order farming activities, e.g. “first buy seeds”, “grow a crop”, etc.)

2. Assign risks for each of the farming activity (e.g. quality of inputs for the first phase where farmer buys seeds) or as a constant risk (e.g. security issues during each phase)

3. Assess the frequency and the severity of the risk (exact quantification is not always possible, sometimes enough to distinguish between different level of impact, e.g. from very low to very high)

4. Prioritize risks based on the assessment (if possible, just 2-3 major or high priority risks; there is always an element of subjective assessment)

5. Identify the root causes for the priority risks identified.

Following these five steps, tools and strategies can be implemented.

Here follows an example for maize crop (Figure 8). Each activity of farming business (i.e. buying inputs, growing maize crop, storage and selling) is characterized by few risks which frequency and impact are reported.

Figure 8: Example of table for risk assessment for Maize

GROUP WORK (to be facilitated by the trainer) #1


· Develop an overview/map of your commodity/area/etc. based on value chain, timeline, or similar

· Assign risks for each step

· Assess frequency and severity of each risk (quantification might not be possible; simple ranking into high, medium, low severity and frequency might be enough).

· Prioritize risks based on your assessment; identify two top priority risks

· Identify root causes of two top priority risks

ADVANCED TOOL: Expected impact of risk and variability

As discussed, risks are identified by two elements: FREQUENCY (or probability of risk occurrence) and SEVERITY (size of losses associated with risk).

As risks are not certain events, the losses caused by the risky environment have to be associated with the probability of the risk itself. Thus, the expected impact of risk is calculated in the following way:

EXPECTED IMPACT OF RISK= FREQUENCY * SEVERITY

In general the expected impact of risk represents the monetary losses that can be expected due to the farming risky environment.

Example:If a risk has a probability of 50% to happen and the size of the losses if the risk happens are 10 mln, the expected losses are:

0.5 X 10,000,000 = 5,000,000

The expected impact of risk represents a loss that can be "constantly" accounted at farm level, as if the negative impact of the occurrence would be shared each of the years that the risk can occur instead of only during the year that the risk physically occurs.

However, the expected value is a not "real" measure of the risk but only an average scenario the risk environment. A risky environment implies that the expected impact of risk are prone to variability that indicates how much the impact of risk differs from its expected value. The difference between what is expected and what actually can happen gives the measure of the variability of the risk.


How often farmers are likely to be affected by risks and how big their consequences are crucial aspects of agricultural risk management. These aspects are called respectively frequency and severity. Consequences need to refer to the average severity, but the worst case scenario, i.e. the worst it can happen in case of risk, could also be considered.

Information and access to information are key components of agricultural risk management as well as to run successfully any farming activities.

It is difficult to predict precisely the impacts of agricultural risks, as most of them may have several consequences in the short and long run, depending on event in time and space. Many risks are also correlated among each other.

The impact of risks is measured (or quantified) in quantity and/or monetary terms as losses due to the negative occurrence. Monetary terms are mostly used for comparability and convenience. The risk can be ranked based by the intensity of frequency and severity.

Chapter 4: Identification of risk management tools

There are many ways to manage agricultural risks at farm level. Choosing the most appropriate tool depends on the type of risk, farmer's and household’s risk profiles and resource availability, goal for business development, services and infrastructures availability of the geographical area. Farmers need to handle risks following traditional as well as more modern on-farm or off-farm practices.


1.

2.

3.

4.

4.1. How to deal with risks

4.2. Risk mitigation;

4.3. Risk transfer

4.4. Risk coping


Session 1: How to deal with risks

Agricultural risks can be handled through different measures. In particular, farmers can try to minimize the negative impacts at farm level (risk mitigation), transfer uncertainty of outcome to other counterparts (risk transfer), accept the negative consequence of the risks (risk coping) and completely avoid any risks (risk avoidance). In this workbook risk avoidance is not considered a risk management measure. However reducing the likelihood of some risks can also be a relevant risk management strategy in some cases.

For all the measures, two cross-cutting elements need to be in place:

· Farmer Awareness: Farmers need to know which tools exist and how they can actively protect farming activities against risks. Extension messages and farmer trainings can be helpful measure to raise awareness.

· Information systems: Understanding and assessing risks require access to information. Data collection on risk related issues is in general weak and requires information systems at various levels (i.e. local, regional, and national). Provision of timely information to farmers is a key component to contain negative effects of risks. Early warning is included as part of the information system.

In details, the measures to face the risks are divided in sub-measures as following:

1. Risk mitigation

· On-farm tools

· Off-farm tools

· Broader agricultural management tools

2. Risk transfer

· Market based tools

· Finance based tools

3. Risk coping

· Savings

· Government transfer tools

4. (Risk avoidance or risk reduction)

In the next sessions, each measure and related tools are explained.

Figure 9 represents the relationship between severity and probability of risks, related risk management measures and main stakeholders' involvement. Most of the risks occur frequently with relatively low level of losses, and may need mitigation measures to be managed at farmer's level. For example, the use of low quality inputs can cause lower yields; to mitigate or fully remove this risk, the farmer has to access quality input in the market. An earthquake instead falls in the category of low frequency-high losses risk. To manage this risk, a combination of measures may be needed for example an efficient information systems, macro level insurance, or government and humanitarian assistance.

Figure 9: Probability and severity and risk management options

A good risk management strategy that mitigates, transfers or copes with risks can empower farmers to invest in more profitable activities rather than avoiding the corresponding risks.



· Your area is prone by biological risks affecting main staple crops. Which are the measures and tools you would put in place as farmer? And as officer of the Ministry of Agriculture?

· If you were an insurer, how would you explain and sell insurance against agricultural risks to a farmer? And to the Government?

Session 2: Risk mitigation

Sub-session 1: On-Farm management tools

The first step is to understand which tools a farmer can use to mitigate impacts of risk. On-farm and off-farm tools can be handled by the farmer herself or may also need involvement and interventions by the community (farmers' organizations and extension workers) and government.

1. Climate smart agriculture

Climate smart agriculture is defined as a set of farming practices put in place in response to the negative effect of climate change on production, incomes and well-being, aiming to increase productivity in a sustainable way, build resilience, reduce greenhouse gas (GHG) emission and enhance food security at local and national level. Climate smart agriculture tools are:

i. Conservation agriculture

ii. Soil and water conservation

iii. Improved livestock management practices.

Conservation agriculture is a set of practices aiming to increase soil fertility and erosion control, and ease drought stress with improved water retention. In details they are:

a. Minimum tillage to reduce soil disturbance;

b. Permanent crop cover with crop residue mulching to manage soil temperatures, reduce evapotranspiration, incidence of weeds;

c. Crop rotations and intercropping of cereals, pulses, roots and tubers to improve soil nutrients composition

d. Planting pits to mitigate the risk of rainfall variability.

Soil and water conservation aims to reduce or eliminate soil erosion and degradation, and increase water use efficiency. Among the practices commonly used, there are:

a. Use of farm yard manure

b. Terraces and bunds

c. Structures and systems to retain rain water

d. Use of water efficient irrigation systems and crops.

Improved livestock management practices may help reducing greenhouse gas (GHG) emission, reducing soil erosion and degradation, and improving water conservation through, for example:

a. Improved livestock feed and manure management

b. Switching to livestock species or breeds that are more adapted to water scarcity and are resistant to disease and pests

c. Pasture management, and

d. Sustainable fisheries and aquaculture.

2. Agricultural (on-farm) diversification

Farmers may also want to diversify their farming activities to avoid that a risk occurrence can compromise all the farm productivity and income. For example, allocating farm's productive resources (land, capital, farm equipment, paid labour, etc.) into several activities that are differently affected by one risks can help farmers to maintain a certain level of income or access to additional income also in case of negative impacts of a hazard.

There are two main types of diversification strategies in agriculture:

i. Crop diversification

ii. Farming enterprise diversification.

Crop diversification reduces the risk that a single crop production failure or loss due to adverse conditions, e.g. weather, pests and disease attacks, or unfavourable market conditions, will affect all the farm production varying the land under cultivation. Farmers can protect themselves choosing to plant multiple crops, either by adopting crop rotation over multiple seasons or intercropping different type of crops (i.e. staple and cash) in the same season.

Enterprise diversification refers to the diversifications of farming activities not only by planting different crops but engaging in different farm businesses, including cash and niche crops (organic produce for example), livestock, aquaculture, apiculture and possibly farm level processing. The diversification can be also geographic. These different enterprises can contribute to increasing productivity in a complementary way, potentially offsetting losses in one with gains from others when a risk occurs.

Crop and enterprise diversification contribute to give flexibility to farming activities. Flexible systems are in general better under risks than steady system: when circumstances change, diversified activities allow farmers to quick changes with relative less resource involved. However, flexibility is not always possible for all farming activities (i.e. tree crops).

3. Other farm risk-reducing choice

Farmers may also use more conventional farm risk-reducing choices to mitigate the risk, for example adopting tools that limit the negative impact of a hazard coming from a single production component, e.g. input, technologies, and crop/livestock activities. For example, drought-resistance seeds, good quality chemicals, irrigation techniques, high marketable/high value crops or livestock are good agricultural risk management practices to improve quantity and quality of farming outcomes acting on single components.

However, farm risk-reducing choices are often not sufficient to reduce risks at farm level as farmers may be exposed to different risks at time, or need to deal with more complex tool. For example, hybrid seed may increase yield under normal rainfall but can behave poorly under different conditions or farmers may decide to cultivate a low profitable crop because of lack of knowledge on how to differentiate their activities.

Sub-session 2: Off-Farm management tools

Farmers can also to diversify their business using their resources for off-farm activities to avoid that an agricultural risk occurrence can compromise all the household income. Farm family assets, including income, are traditionally used to limit the negative effect of shock on household livelihood. There are two main types of off-farm diversification tools:

i. Asset diversification

ii. Income diversification.

Asset diversification includes maintaining a balance between productive assets such as land, livestock, irrigation systems, machinery, food stocks, and less productive assets, such as money, savings accounts, jewellery, food reserves, small animals.

Income diversification has the objective to generate income through non-farm jobs. For example many farmers (or in general some members of the household) sustain farming activities is certain times though off-farm jobs, e.g. working in a factory or having small shops.

Asset and income diversification can be applied at the farm level by an individual farmer or the entire household. However, these tools need the existence of off-farm income earning opportunities in the geographical area, such as processing, agribusinesses and non-agricultural/industrial activities. A well-diversified local economy makes farmers much more resilient to agricultural shocks and able to maintaining their livelihoods in difficult conditions.

Sub-session 3: Broader agricultural management tools

Farmers may find useful to use tools at farm level that are generated outside their farming activities, i.e. at local or national level such as:

· Technology adoption: adoption of low-cost technology for risk management that allows improving farmers' resilience to risk and overall farm productivity. In general, this type of investment pays-off in few years.

· Improved input markets: use of low quality inputs is a risk that often needs a joint public-private effort. Enforcing quality standards in the value chain, and training input suppliers and farmers are important elements for mitigating the risk for farmers

· Improved pest & disease management: identifying on time pest and disease outbreaks are important tools to lower risk exposure for farmers. Farmers can adopt remedies that are suggested by the local and national government on this issue.

· Improved infrastructure: famers may reduce their risks exposure using and adopting sustainable infrastructural tools for storage, quality assurance, water availability and price stabilization at aggregate level. Access to this infrastructure can allow also an upgrade of both farming and downstream value chain activities.

Table 4: Pros and cons of risk mitigation tools

PROs

CONs

· Climate smart agriculture practice can improve the sustainability and long-term resilience of agricultural practice to climate change

· Climate smart agriculture practice can be not-cost effective in the short run and not lead necessarily to higher yields

· On-farm diversification allows quick changes of farming activities if conditions become averse

· On-farm diversification need a careful plan and different competencies

· Off-farm diversification can reduce income variability and make household livelihood less dependent from agricultural activities

· Off-farm diversification may need capital and different competencies and opportunities (not always available)

· Farm risk-reducing choice and adoption on new tools at farm level, such as input and technologies, lead to stable or higher yields and tends to be cost-effective in the medium run

· Farm risk-reducing choice and adoption on new tools at farm level, such as on input and technologies, can be useful only in combination with other farm choices or tools, and can be expensive

· Farm risk-reducing choice can reduce the income potential of farming activities

EXERCISE #1

Farmer John's family owns three hectares of land. All the family members (John, his wife Anita and their two sons – of 18 and 15 years old) work on the land. In good years they harvest enough quantity of maize to be consumed and be sold in the market, and have enough money to live on this monoculture. However, in the last five years, they notice that the yields are decreasing, probably due to the decrease of rains.

What can farmer John's family response to that if:

1. They have only few money to invest on the farm;

2. They have enough money to invest on farm activities;

3. If you know that one of his son has a vocational diploma and they live at commuting distance from a medium-size village

Illustrate your ideas about the three above options.

__________________________________________________________________________________________

__________________________________________________________________________________________

_______________________________________________________________________________________

______________________________________________________________________________________

Session 3. Risk transfer

Sub-session 1. Market related tools

Farmers can also make use of marketing tools to manage agricultural risks. Crop and livestock are important for livelihood and income of the household but often the negative consequences of prices variability and uncertainty about sales cannot be offset only by risk mitigation tools. Marketing tools can help farmers to gain profits from their farming activities guaranteeing them the highest possible price for their agricultural commodities and secure access to the market with the minimum possible risk. In details, the tools are:

· Contract farming

· Commodity exchanges and futures markets

· Warehouse Receipts Systems (WRS)

1. Contract farming

Some risks related to production and marketing can be shared between farmers and other firms under various contractual arrangements, ranging from the procurement of the farm produce to a full control of farming operations. These contractual arrangements are, in general, between small-scale producers and commercial stakeholders/companies. These later may involve traditional farming and trading, large multinational supermarket chains contracting with a farmers, out-grower schemes, fair-trade schemes and multi-stakeholder coordination along the value chain.

The primary purpose of contract farming is to reduce or eliminate price and market risks for farmers (i.e. guaranteeing them a fix price and/or a certain amount of supply in advance) transferring the risks to the other contracting party which will eventually enjoy the extra profits.

One widely used contract farming is the out-grower schemes that involves a closer link between small farm operations with a processor or a large farm/firm which supports or controls production planning, input supply, technical advice and transport. This type of arrangement provides guaranteed market access and covers some or all non-labour costs for the producer. Collective marketing arrangements help instead small-scale producers in groups, associations or cooperatives to manage price/marketing risk by enabling their access to domestic, regional and international markets, reducing their transaction costs and improving their bargaining power.

2. Commodity exchange and future markets

These tools are intended to allow farmers (often with intermediation of farmers' organizations and extension service) to manage risk in agriculture using modern marketing facilities in the form of commodity exchanges and futures markets.

In particular, a commodity exchange is a "platform" where different groups of participants - buyers and sellers - trade agricultural commodities and commodity-linked contracts to transfer price risks, based on rules and procedures previously defined by the exchange. A large numbers of sellers and buyers place their legally and financially offers/orders of a specific quantity and quality of a commodity eliminating the need to have face to face contact or the physical display/handling leading to more accurate pricing and efficient marketing.

More advanced commodity exchanges also handle futures contracts, i.e. agreements for a specific future time, transferring the risks to another business keen to accept them. In this case, the buyers and sellers trade a contract instead of a commodity.

This tool may, however, have a current limited use for most small farmers especially where commodity markets and contracts do not exist or are of difficult access and implementation. In the future, it is likely that more and more transactions will move towards commodity exchanges and futures trade.

3. Warehouse receipts system

A warehouse receipt system (WRS) is a formal agreement between a licensed storage facility and a named depositor (in general a farmer) on quantity and quality of a specified commodity held in a secure storage environment. The document or certificate of deposit, called the warehouse receipt, certifies the ownership of the stored commodity, and it can be used as a collateral instrument to obtain financing by the depositor from a bank or input suppliers. WRS can be public, private, or the result of a partnership including local communities or farmers’ organizations.

The steps for a WRS are:

1. A farmer deposits a storable agricultural commodity in a warehouse

2. The warehouse issues a receipt to the farmer

3. This receipt can then be used as collateral to obtain a loan or to market the agricultural commodity as desired.

All the marketing tools, involving contracting between farmers and other counterparts, need to critical pre-conditions:

· Trust between farmers and other contracting stakeholders;

· Clear understanding of contract conditions;

· Balanced bargaining power between the two contractors;

· Symmetric access to information between the two contractors.

Table 5: Pros and cons of risk transfer market-related tools

PROs

CONs

· Contract farming can guarantee a certain cash flow for farmers and market access

· Contract farming can be disadvantageous for the weakest part (i.e. farmers cannot benefit from a premium price, there is lack of flexibility, high transaction costs can be experiences, etc.)

· Commodity exchange and future markets offer a common place where sellers and buyers can meet

· Commodity exchange and future markets may lead to risk of contract non-compliance and opportunistic behaviour, and can be difficult to understand and implement

· WRS can provide benefits for all the parties involved including farmers, traders, creditors and warehouses

· WRS may risk inefficiency, mismanagement, fraud, failure

Sub-session 2: Finance based tools

Facilitate by other stakeholder (extension workers, government, national/international donors and private sector actors), farmers can also have the opportunity to access modern solutions to match supply and demand of agricultural commodities through market and financial tools. In addition to traditional agricultural credit and insurance institutions, innovative risk financing tools are based on the principle of risk sharing and are the following:

i. Agricultural insurance

ii. Weather index based insurance

iii. Agricultural finance and microfinance

1. Agricultural insurance

Agricultural insurance can be used to cover losses for all the farming activities and it is one of the best known ARM tool. It is an ex-ante measure to cope with farm production and/or revenue losses, for example crop insurance aims to protect a farmer’s risk of unforeseen hazards in land, yield or production for this specific crop.

Agricultural insurance has individual farmers as policy holders, with their own contract protecting against their own risks. Some services can be precisely designed to clients with a low income and limited access to mainstream insurance services, i.e. micro-insurance. It differs from traditional insurance as, besides targeting people with a low income, it looks at their specific needs of farmers such as affordability and inclusiveness, simplicity and clarity in documentation, accessible processes, and building trust among target clients.

2. Weather index based insurance

The weather index insurance (WII) is an alternative tool to traditional agricultural insurance. Index-based insurance relies on the estimated losses based on the index value and does not require a field assessment of each policy holder. In particular, WII compensates for damages or loss based on values obtained from an index on weather parameter (e.g. rainfall or temperature in a given area, or vegetation indexes from satellites) that conveys information for losses experienced by all farmers in the given area. This eliminates the need for a costly assessment of the actual damages of individual policy holders. WII is often a cheapest form of insurance that better fit the need of micro-insurance.

Successful implementation of a WII scheme depends on keen participation and strong involvement/commitment of:

· Farmers interested in purchasing/acquiring insurance protection (with or without subsidies),

· Governments to guarantee an enabling regulatory and legal framework, available public weather and agronomic data, and, potentially, subsidies as part of social protection measures

· Insurance companies willing to provide insurance

· Donors, also though local NGOs to facilitate and be a catalyst for this tool.

WII provides a buffer to protect the farmer against shocks that is similar to having savings. However, savings would be less convenient for weather protection if the farmer has not accumulated sufficient amount to cover their losses in the event of a drought. WII provides indemnities that are not directly responding to losses and this may imply that indemnity payments may not be triggered even if farmers experience losses (basis risk).

3. Agricultural finance and microfinance

Having access to secure and affordable credit is an important means for coping with risks in agriculture and minimize their impact on farmer's livelihood. Being able to borrow, save, invest help farmers take control of their lives and protect household against agricultural risk.

Microfinance Institutions offer basic financial services (typically loans and savings but some may offer personalized financial services) to individual clients or a group of clients. Their transaction costs vary and therefore their charges also range from very low to very high especially given that they deal with very small amounts per account and whether they themselves receive external aid/development funding.

Table 6: Pros and cons of risk transfer finance-related tools

PROs

CONs

· Agricultural and weather index insurances provided reliable cash flows to protect asset and production activities, and offset farming failures

· Agricultural and weather index insurances are not very common especially in Africa, as costs are high and lack (or partial) information can put smallholders in a weak (bargaining) position

· Agricultural finance and microfinance can be viable tools to enhance farming activities and protect them from risks.

· Agricultural finance and microfinance often encounter problems such as loan default and high transaction costs.

EXERCISE #2

Farmer Tom cultivates half hectare of rice ( yields of 4 tonnes/hectares). He sells half of his harvest during the peak season; the rest is stored in his house with average losses of 20% per season. He can sell rice at 10 LC/kg during the peak season and 20 LC/kg during the low season.

A neighbour farm told Tom that a licensed storage facility just opened nearby. The licensed storage facility guarantees no losses on rice, due to improve temperature and storage conditions. For 0.5 tonnes of rice, Tom would pay 1,000 LU/year as fee.

Would you recommend Tom to use the storage facility? Does your answer change if the fee would increase up to 2,500 LC/year for 0.5 tonnes? Articulate your answer considering that Tom would like also to buy a tractor and needs a loan from the local bank.

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Session 4: Risk coping

For certain type of risks, farmers need to find a way (and tools) to cope with that. Coping with risk are ex-post tools such as:

i. Saving mobilization

ii. Government transfer tools

Savings mobilization helps farmers to provide household livelihood when a risk occur and no other tools to mitigate or transfer risks are sufficient for this. Despite risk reduction and transfer, farmers in fact can still be negatively affected by risks. Therefore, farmers have to build up a buffer through savings to prepare for harsh times.

Government transfer tools are used to avoid that farmers have to reduce food intake, essential service access, due to occurrence of hazards, such as severe droughts, earthquakes, etc. Government is needed to put in place interventions to lessen some of the negative impact to its population. Tools are for example public food grains reserves, disaster assistance programs, social protection and safety nets. The design of transparent security mechanisms (e.g. through voucher systems, cash/food for work programs, etc.) is needed to avoid inefficiencies in the system and to ensure that markets are not disrupted. Government tools are more efficient to handle bigger systemic risks (catastrophic disasters) that are beyond the capacity of farmers and communities to cope.



· Which are the most used tools in your area? How would you judge their effectiveness?

· Which are the tools that you think wold be useful in your area – but they are currently not available? Why?

Figure 10: Examples of agricultural risk tools a farmer can use


To manage risks at farm level, farmers can adopt different measures, i.e. trying to minimize their negative impacts through risk mitigation tools, transferring uncertainty of risks outcomes to other counterparts with risk transfer tools, accepting the negative consequences helped by risks coping tools.

On-farm and off-farm tools, market tools, financial tools depend on the type of risk, farmer's risk profile and resource availability, goal for business development, services and infrastructures availability of the geographical area.

Coping with risks include the existence of farm liquidity and government actions. Farmers should not expect government or humanitarian actions except in the case of catastrophic disasters.

Chapter 5: ARM Strategy and Monitoring

Tools selection, implementation and monitoring are important steps to manage risks at farm level. Several and diverse tools exist in all the rural contexts: farmer's role and responsibility is to choose the ARM tool best suited for the purpose and decide if and how to implement ARM tools. The choice of the tool also depends on its costs and expected benefits. This behavioural response or strategy to manage risks needs to be integrated into a broader farm strategy. Monitoring the outcome of the strategy then gives the feedback that will help improving the overall farm approach to risks.


5.

5.1. ARM strategy

5.2. Tools monitoring activities


Session 1: ARM strategy

1. Definition

Th

Documents

Preface - p4arm.org · Web viewThis workbook is the result of PARM recent experience on implementing short capacity development events on Agricultural Risk Management in Uganda,